Read this and tell me you don’t need a shareholders agreement!

What is the default position where you don’t have a shareholders agreement or tailored Articles of Association for your company?

Limited companies have simple default structures and rules, which don’t necessarily reflect the nature of the relationships that the participating shareholders want to have with the company and with each other. Once a shareholder has acquired their shares, then the default position is that:

• There is no requirement whatsoever for them as shareholders to lift a finger to make any future contribution to their company in terms of time, effort or money.
• They can’t be removed as a shareholder. This can be good for them, but annoying for other shareholders who might want them to leave one day (for example if they stop working for the company).
• Their shares automatically entitle them to the same rights per share as all other shareholders in terms of voting rights, dividends and returns on capital.
• They can ride the back of the successful growth of the company and will usually participate (if only because any controlling shareholders will want them to) in any subsequent exit, whether by way of a share sale or a flotation.
• If a majority shareholder (even one owning almost all the shares in the company) wants to sell the company to a buyer they generally can’t do so unless they can persuade any minority shareholders to sell as well, which can be a pain. Any buyer will want to buy the whole company. This is why any majority shareholders should want a drag-along provision in a shareholders agreement or in their company’s Articles, even if that’s the only thing they get covered.

The other side of the coin is that if someone has a minority shareholding (ie under 50%) then unless they have extra protections under a shareholders agreement or Articles of Association (or can gang up with other shareholders so that between them they have over 50% of the shares):

• Their voting rights are usually completely useless in giving them any say as to how the company is owned or managed.
• They only get dividends if the controlling shareholders choose to pay dividends.
• Having shares gives them no job security whatsoever – they can get kicked out as an employee or director at any time (once the correct procedures have been followed).
• Their shares are pretty much worthless unless they can sell them. Which they generally can’t unless the board/majority shareholders agree. And there is no ready market anyway for minority shares in a private company. Who would want to buy them? Who would want to take the risk of buying a minority shareholding in a company controlled by someone else where they have no say in how the company is managed and no certainty of ever receiving any dividends or of ever being able to sell their shares?!

Tell me more: if I hold shares in a company what rights do they actually give me?

The default position for any private company is broadly as follows:

• All shareholders have:
  • One vote per share.
  • The right to receive the same amount per share as any other shareholders when it comes to dividends and returns on capital (for example if the company is wound up).

• Holding over 50% of the voting shares gives you (meaning any one person or group of people who between them own this percentage) the ability:
  • To appoint and dismiss directors, and therefore to load the board of directors and have full control
  • To sanction new issues of shares
  • To declare dividends

• Holding over 75% of the voting shares gives you the ability:
  • To change the Articles
  • To disapply pre-emption rights
  • To wind the company up.

The next Guide in this series about shareholders arrangements will be an introductory Guide as to various reasons for having a shareholders agreement in different types of shareholding scenarios which might arise during the course of a company’s lifecycle. This will be followed up by a series of more in-depth Guides covering different types of shareholding scenario, starting with the kinds of things company founders need to think about before they even start to prepare any agreement, followed by the kinds of issues founders should look to address in a shareholders agreement.

If you are a director or shareholder of a company and you want more information on how to deal with shareholders and director relationships so you can protect the value of your business and your role in it and your business and exit objectives then please get in touch.

Written by Andrew James – andrew.james@workingfree.co.uk

About Andrew James

Working Free is pleased to be collaborating with Andrew James of OnHand Counsel Ltd.

Andrew James owns and runs OnHand Counsel Ltd, providing the services of a corporate and commercial Solicitor based in St Albans but available to Working Free clients anywhere in England, and, possibly more widely in the UK.  Please email andrew.james@workingfree.co.uk

Andrew James offers this signposting service and sets out in the following section Headings for the different areas of the law which may come into play in your work. In some cases, he will be able to advise personally as a lawyer and by agreement.