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opportunity issue articles

Summer / Autumn 2019 Opportunity Articles

Protecting your interest in your limited company

By Tim Field, Associate Solicitor, Birkett Long LLP

In the early stages of a business, focus tends to be on developing the business, but shareholders can benefit greatly from putting a shareholders’ agreement in place early, as a mechanism for dealing with future changes.

Shareholders’ agreements help manage and minimise internal conflict risks between management through a formal written contract. A shareholders’ agreement also sets out how conflicts should be resolved should they arise.

I am often asked to draft shareholders’ agreements or provide advice concerning investment into a company limited by shares. There are several important considerations, but a key aspect is putting an effective exit strategy in place, along with when and how shareholders can transfer their shareholding and realise their investment.

A wide variety of clauses can be drafted - one size does not fit all. It may well be that a majority shareholder will require certain rights to drag their fellow shareholders into a sale of their shares, if a suitable offer is received to purchase the company.

As a concession to the minority shareholders, they may similarly be provided with a tag along right to force through the sale of their shares if a majority shareholder is looking to exit by way of a sale.

It is entirely possible that a majority shareholder may seek to have pre-emption rights granted in their favour, providing them with the right to acquire minority holders’ shares as and when they choose to sell.

Where there is not a significant variance in the percentage shareholding of the parties, rights of pre-emption, or first refusal, may be appropriate. This will give the existing shareholders the rights to buy a selling shareholder’s shares before they are offered to a third party.

The most significant problems tend to arise when two individuals both hold 50 percent of the shares, with no majority shareholder. In this situation, perhaps agreement of a ‘Russian Roulette’ clause could break the deadlock. In this case, one party offers either to buy the shares of the other party or to sell its own shares to the other party (but not both) at a specified price. The party in receipt of the offer can either accept the offer or reverse the offer at the same price.

Key to all dispute resolution clauses is that they should be mutually agreed between the parties before a dispute arises. But what about when an employee who holds shares in the company leaves its employment?

Provisions for good and bad types of leaver can be used to regulate how much departing employees are paid for their shares. It may be that if they are dismissed for gross misconduct (a bad leaver), so a nominal value should be paid for their shares. Whilst if they are retiring (a good leaver), a more generous payment might be appropriate.

A senior employee may require different provisions relating to their shares, by way of lock up perhaps, so the value of the shares is only realisable after a defined period, or when certain targets have been met.

If you would like to discuss share transfer provision options in more detail, please contact Tim Field on
E: tim.field@birkettlong.co.uk T: 01206 217366 or visit: birkettlong.co.uk

Sue Wilcock