The use of the company structure is quite common in today??s business environment. A prospective shareholder will retain a solicitor to incorporate the company or buy it ??off the shelf??. The company will comprise of a box of documents containing various Registers, a Seal, Certificate of Incorporation and the Constitution.
The Constitution is a contract between the shareholders and the company, and amongst the shareholders themselves. However, the Constitution itself may not be appropriate to deal with the commercial relationship that the shareholders believe they have entered into. In many cases, the shareholders consider themselves to be ??partners??, only utilising a corporate structure to provide them with certain commercial, legal and tax advantages.
In accordance with the Constitution, decisions will usually be made by majority vote at a directors?? meeting. As you will see below, this decision making process may not necessarily be appropriate to cover all business issues. It is for this reason that shareholders should consider entering into a Shareholders?? Agreement.
1. Additional Funding
The Shareholders?? Agreement usually contains a mechanism to address a company??s funding requirements. For example, it can stipulate that all shareholders provide such funding and personal guarantees or subscribe for further shares in the company, on a proportionate basis. If a shareholder fails to do so, then the Shareholders?? Agreement can provide that the ??defaulting shareholder?? not be entitled to exercise his or her voting rights until funding is provided, or otherwise indemnify the other shareholders for any funding provided or guarantees given by them.
Where capital is to be raised, the Shareholders?? Agreement would normally stipulate that any share issue be first offered to the existing shareholders on a proportionate basis, with the remaining shares to he offered to those shareholders who have agreed to subscribe for shares in the first round. If there are shares still available, then they can be offered to a third party on no more favourable terms.
2. Sale of Shares
In the event that a shareholder wishes to sell his or her shares, the market for those shares may not necessarily be liquid. The shareholder remains ??trapped?? in the company.
One way of addressing this concern is for the outgoing shareholder to be entitled to offer his or her shares at a certain price or at their fair value (as determined by an independent valuer) to the existing shareholders, on a proportionate basis.
If the existing shareholders do not wish to acquire those shares, the outgoing shareholder would then be entitled to sell those shares to a third party on no more favourable terms. To counter this, the remaining shareholders may wish to retain a discretion as to whether to accept a third party as a shareholder.
If there is concern that the price at which the shares are being offered is inflated, the remaining shareholders may require the outgoing shareholder to buy their shares at the same price or, alternatively, require a tag along right. A tag along right allows the remaining shareholders to require the outgoing shareholder to procure that the third party buy their shares at the same price as that offered for We outgoing shareholder??s shares If the third party does not do so, the outgoing shareholder would not be allowed to sell his or her shares.
3. Voting Rights
At a directors?? meeting, each director has one vote. A shareholder would usually have one vote for each share held.
At a directors?? meeting, the majority vote will prevail
In the case of a shareholders?? meeting, the passing of a resolution may be by majority, in the case of an ordinary resolution, or by at least 75% of the vote, in the case of a special resolution. However, in business, the shareholders may require that certain matters be afforded different degrees of importance, so that decisions may require a simple majority, a majority of three quarters of the shareholders?? vote or even unanimous approval. In some cases, specific management issues of the company may be made subject to the consent of a specific shareholder.
Matters to be considered would include the purchase or formation of any business, the acquisition of assets of a certain value, the hiring and firing of employees, the payment of a dividend and the raising of finance.
4. Deadlock
Where the shareholders cannot come to an agreement on an issue, the Shareholders?? Agreement can provide for its resolution. The mechanism could include the shareholders buying each other out, the appointment of an independent third party mediator, the winding up of the company or some other agreed method.
5. Key Events
If a shareholder dies, becomes bankrupt or insolvent, breaches the Shareholders?? consideration to entering into a Shareholders?? Agreement, or fails to provide necessary funding, the Shareholders?? Agreement can confer an option on the other shareholders to buy out that shareholder.
The shareholders should consider effecting insurance which, in the event of death or disability, will allow them to fund the buy out of that shareholder.
6. Retiring Shareholder
If a shareholder resigns or retires from the company then the Shareholders?? Agreement can oblige the retiring shareholder to maintain confidentiality about the business of the company arid prohibit him or her from competing with the company.
7. Termination
Where the shareholders decide that the company ought to cease carrying on business or that the business be sold, then a Shareholders?? Agreement can provide for the disposal of the assets in an orderly fashion and address the rights and address the rights and obligations of the shareholders in those circumstances
The Constitution of the company, although being the primary document governing the rights and obligations of the shareholders in the company, may not be adequate enough to deal with many of the commercial issues facing a company and its shareholders. Shareholders or prospective shareholders wishing to utilise the corporate structure should give strong consideration to entering into a Shareholders?? Agreement.
