A well-drafted shareholders’ agreement is the cornerstone of a successful business partnership. It not only defines the rights and responsibilities of shareholders but also provides clarity in areas like decision-making, dispute resolution, and future funding.
At Stephensons, we take a bespoke approach to drafting shareholders’ agreements, ensuring that they reflect the unique needs and goals of each client. Here’s a look at how we guide clients through the process and a case study that demonstrates the practical value of a well-structured agreement.
Step one: understanding your goals
Before drafting a shareholders’ agreement, it’s essential to understand your business objectives. We work closely with you to identify:
- Purpose: Why is the agreement needed? Are you protecting existing shareholder rights, onboarding new investors, or planning for future growth?
- Ownership structure: How will shares be allocated amongst shareholders?
- Key personnel: Are there critical team members whose roles and contributions need to be safeguarded?
- Long-term vision: What are the company’s growth plans, and how should shareholder interests align with these goals?
This initial stage ensures that the agreement is tailored to your strategic needs and priorities.
Step two: asking the right questions
To create a comprehensive and effective agreement, we ask detailed questions, including:
1. Governance and decision-making
- What decisions will require unanimous consent versus a simple majority vote?
- Who will sit on the board of directors, and what powers will they have?
2. Share transfers and exit strategies
- Are there restrictions on transferring shares to third parties?
- What happens if a shareholder wants to exit or is unable to continue their role as a director or a key employee?
3. Dispute resolution
- How will disagreements between shareholders be resolved?
- Should there be mechanisms like mediation or arbitration?
4. Dividends and financial matters
- How will profits be distributed?
- What are the terms for raising additional funding, and how will this affect shareholding?
5. Key personnel and retention
- Are there specific incentives or protections needed to retain critical team members?
These discussions help us draft an agreement that minimises risks and promotes harmony amongst shareholders.
Step three: how clients can prepare
To make the process efficient, we recommend clients prepare by:
- Gathering relevant information: Shareholding structures, key personnel details, and growth plans.
- Defining expectations: Clarify roles, responsibilities, and desired outcomes for all shareholders.
- Anticipating challenges: Consider potential disputes, exits, or changes in ownership, and how they should be managed.
Being prepared with this information allows us to create an agreement that covers all necessary aspects while saving time and resources.
Case study: retaining key personnel in a strategic acquisition
A recent case we worked on highlights how a carefully drafted shareholders’ agreement can achieve multiple objectives. Our client was acquiring the entire share capital of a target company. The success of the business heavily relied on key personnel who had been instrumental in its growth. To ensure their continued involvement, we structured a shareholders’ agreement that:
- Granted minority shares: Key employees received minority shares as an incentive to stay and contribute to the company’s success.
- Protected the client’s majority interest: Provisions such as restricted share transfer clauses ensured that the client retained control over strategic decisions.
- Included non-compete clauses: These clauses prevented the key personnel from competing with the company during and after their tenure.
- Linked employment terms to shareholding: Shareholding was tied to continued employment, aligning the interests of key personnel with the company’s long-term growth.
This tailored approach allowed the client to retain the expertise of the team while safeguarding their majority ownership and aligning incentives for sustained business success.
Our specialist commercial law solicitors are experienced in drafting and negotiating shareholders agreements for businesses of all sizes. Call us today on 0161 696 6170.
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