Making A Shareholders' Agreement - Checklist
If you are thinking of drawing up a Shareholders' Agreement for your company then you will find this checklist invaluable...
You should consider a shareholders' agreement as a "pre-nuptial" agreement. You are trying to reach a consensus in advance of a possible breakdown in the relationship. 1 in 3 marriages fail and the failure rate for business is much higher. Negotiating with your business partners ought to be a lot easier than with your spouse as the "don't you love me" doesn't come into it!
Here is a non-exhaustive list which you could use as a limited agenda for discussions between proposed or existing shareholders. This should be followed by detailed legal advice and then a written agreement between the parties.
1. Alternatives: limited company, partnership or limited liability partnership etc
Assuming you select a limited company:
2. Purpose of venture. Business plan. Expectations.
3. Share split a. Implications of key thresholds: 5%, 10%, >25%, 50%, >50%, 75%b. Deadlock vs controlling stake vs negative control/ability to blockc. "Ordinary", "Special", "Written" resolutionsd. class: ordinary, preferred, redeemable etce. dilution (now and future)
4. Directorsa. Day-to-day managementb. How manyc. Right to appoint/removed. Chairman; casting vote?e. Service agreements: salary level?
5. Company name, company secretary, registered office, accountant/auditor
6. Finance a. Share capital vs debti. Allotment of new sharesii. Cash/non-cashiii. Director's loaniv. Second roundb. Security? Debentures/charges. Personal guarantees. Indemnity to each other?c. Working capitald. Bank mandate: joint signatories?e. Dividend policyi. consider minimum % profits to be distributed or retained if no agreementii. dividend versus salary balance
7. Business plan and budget incl cash flow; agreed intervals
8. Exit strategy (the important one!)a. Share valuation mechanismb. Discount/premium for certain stakesc. Ability to transfer part or whole stake onlyd. Staggered exit – tax and valuation implicationse. Trigger events egi. Death/serious illnessii. Divorceiii. Trade saleiv. One party wishes to leavef. When to wind company up g. Pre-emption rightsh. Ability to transfer to spouse/childreni. "Shoot-out" provision: party receiving notice must elect either to purchase shares of other party or sell its shares to that partyj. "Bring-along" provision: transferor must require third party purchaser to offer to buy also the other party's interest at the same price per sharek. "Drag-along" provision: selling party can oblige other party also to transfer its shares to the same purchaserl. Put/call options included at outset
9. Matters requiring unanimity
10. Dispute/deadlock resolution mechanism (Ultimate sanction: specific right after minimum period for either party to call for liquidation)
11. Personal tax planning issues affecting structure
12. Intellectual property
As you can see there is a lot to consider when you go into business with some one. Better that you discuss these issues up front. We have run through this list with numerous clients and the most frequent feedback is: I really didn’t think about that. Thanks. Hopefully the answers you come up with don’t mean that your business relationship founders immediately. If you find it difficult to reach a consensus with your business partner now on key issues let this be an alarm bell. Consensus is often more difficult to achieve further down the road.
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ABOUT THE AUTHOR
Martin Truman is a qualified solicitor who advises clients all over the UK. You can find out more about Shareholder Agreements and how best to draw one up for your company from the Shareholder Agreement section of his legal advice web site.