24 June, 2020
Owning a company on your own is great, it means you have ultimate control over any decision which the company makes, without having to consider what anyone else thinks. However, as soon as a company is owned by more than one person, things become a little more complicated. The more shareholders of a company the more opinions and therefore, the greater the risk of conflicts arising regarding the management of the company. It is inevitable that not all shareholders will agree all of the time, making decision making more difficult at times and in some extreme cases, shareholders have been seen to petition for the winding up of a company, where there is a deadlock situation and a decision cannot be reached by the shareholders.
This is where a Shareholder's Agreement (SHA) comes into play. A SHA is an essential document for any company owned by multiple shareholders - regardless of the relationship of the parties (even family owned companies would benefit from such an agreement). A SHA will include various provisions relating to the management of a company and decision making, amongst other things and provides an extension to the company's articles of association (Articles), which are not always particularly detailed when it comes to the practical day to day management of a company.
Some of the key provisions which can be covered in a SHA include (but are not limited to):
Unlike a company's Articles, which are publicly available at Companies House, a SHA is a private agreement that only the shareholders will have sight of. This is particularly attractive to shareholders who want to include specific details relating to the running of the company, but which cannot be available to the public - such as a specific dividend policy or details relating to key business decisions which may be confidential.
Another benefit of a SHA which we often see shareholders needing advice on is in relation to "Compulsory Transfer" provisions, which allow shareholders to serve notice on a shareholder who may have done something wrong. This is particularly important when there is a shareholder dispute as neither statute nor the Model Articles, provide such a mechanism to shareholders to remove another shareholder.
COVID-19 has added a further obstacle for companies and shareholders who may need to make important decisions about a company quickly to keep up with the current, uncertain economic climate.
With COVID-19 very much still having an impact on businesses and developments being announced almost every day, it is vital that shareholders understand how decisions can be made and who must consent to certain decisions, before the company can take action. If you have a SHA in place already make yourself familiar with the decision-making process to ensure that this is still adhered to when making quick decisions in response to COVID-19. Also, consider if your existing SHA should be amended to include processes to follow in emergency situations including, what to do if a shareholder is not able to participate in such a process. If you do not have a SHA in place, consider how your Articles currently work and whether these provide you with sufficient protection or whether you should now look to enter into a SHA.
Another impact COVID-19 may have on a company is if a shareholder tests positive for COVID-19 and is admitted to hospital or, subsequently dies. Whilst it is not something which anyone wants to consider, a SHA can provide details on what happens next making the process regarding shares a little easier for all involved. It is usually the case that on death, the deceased shareholder's representative(s) will inherit the shares in the absence of a SHA. This can be problematic for the remaining shareholders as well as for the deceased shareholder's estate, for the following reasons:
If you are a shareholder of a company that currently does not have a SHA we would always recommend that you enter in to a SHA to protect the interests of the company and all its shareholders, and reduce the amount of avoidable disputes that are not covered by the Articles. A SHA will help maintain a better working relationship between the shareholders as the 'rules' that govern their relationship are consolidated. If you have a SHA we can carry out a review of the same and provide you with advice on how you could update this. We can offer fixed fee packages for the review or preparation of a SHA.