Getting a new business up and running can be a difficult and at times convoluted process. Expanding the business by obtaining funding and dividing equity amongst shareholders can be both exciting and daunting. When there is more than one shareholder in a business a Shareholders Agreement is a critical and necessary document for you to have in place.
There are a million things to think about when you’re starting a new business. Below the team at Cubed by Law Squared step you through how to manage the relationship between your business and its shareholders.
What is a Shareholders Agreement?
A Shareholders Agreement represents the mutual understanding between the shareholders of your company. It formalises their position in the company and confers particular obligations, rights and responsibilities on shareholders (including rights regarding the sale and transfer of shares) and outlines the dispute resolution process.
What does a Shareholders Agreement cover?
Traditionally a complex, comprehensive document Shareholders Agreements must cover all aspects of the relationship between shareholders and the company. The Agreement sets the boundaries and parameters for directors, including (but not limited to):
- The allocated proportions of shares for each shareholder (at the date of signing);
- Options for employee share schemes (if applicable);
- Procedures for any dispute resolution process;
- The details and procedures for shareholders meetings; and
- The process when a shareholder wants to sell or transfer their shares in the company.
> Proportion of shares
At the date of signing the Agreement it must outline the share structure of the company. This not only includes any individuals who have shares, but also trusts and other companies with shareholdings and their relevant allocations and share types.
Whilst there are many categories of shares the two most common are ordinary and preference shares. The difference between ordinary and reference shares is that, when dividends are declared on shares for the financial year, shareholders holding preference shares have first rights to dividends and these dividends are capped. Preference shareholders also have a right to have their capital repaid in the event the business fails. Ordinary shareholders are paid out sSecond – both in dividends and in the event the company fails. Ordinary shareholders carry voting rights as outlined within the Shareholders Agreement.
> Employee share schemes (ESS)
From time to time if the company has the capacity it may issue a notice for the sale of shares to their employees. This is known as an Employee Share Scheme (ESS) or Employee Share Option Plan (ESOP). Where a company engages in an ESS/ESOP, they must stipulate clearly in the Shareholders Agreement the procedure for inviting new employee shareholders, the sale of the shares as well as the mandatory buy-back procedure for if they ever leave the company or are terminated. The latter will include any details of remuneration for those shares the employee held at the time of resignation or termination.
> Defaulting shareholders
If shareholders don’t uphold their obligations as specified under the Shareholders Agreement they are considered to be in default and action can be taken by the company. Where a shareholder becomes a defaulting shareholder a common procedure is to allow other non-defaulting shareholders the option to acquire those shares. As shareholders can fall into default in a number of ways – convicted of a crime, failure to give notice of change of control of a shareholder who is a trust, or they don’t live up to their obligations under the SHA – it is important to have a procedure in place to deal with these scenarios.
> Shareholders meetings procedures
As shareholders are often separated from the day-to-day management of the company there are specific requirements that need to be satisfied at shareholders meetings to ensure decisions are passed. Each shareholder with voting rights is often given one vote per share that they hold and often decisions will need to be passed by a majority. The procedure for calling and holding a shareholders meeting is also outlined in the SHA, including the relevant quorum which must be present. A quorum is a specified number of shareholders which need to be present – or otherwise, a specified proportion of shareholdings which need to be present – in order for a decision to be passed. This is also often by a majority or in some circumstances 75% of votes or greater.
> Selling or transferring your shareholding in a company
In the instance that an existing shareholder wishes to transfer, assign or sell their shares to either another existing shareholder or a new shareholder, companies must have a process in place to facilitate this disposal of their shares. Traditionally all shares being offered for sale must first be offered to existing shareholders before being offered to non-existing shareholders.
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This article is written by Law Squared and was first published on Law Squared’s website.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.
