Shareholders' Agreement Checklist

A shareholders’ agreement, also known as a stockholders’ agreement, is an arrangement among the shareholders that sets out how the business should be operated. It also outlines the shareholders’ rights and obligations as well as information about the management of the company and the privileges and protection of shareholders. 

If you’re creating a shareholders’ agreement, this checklist will ensure you create an in-depth well-structured agreement for your business. This will help to avoid miscommunication and establish shareholder rights and responsibilities.

The basics of a shareholders' agreement 

Shareholder agreements are created to ensure that shareholders are treated fairly and that their rights are protected. The agreement will also outline the fair and legitimate pricing of shares, to make sure shareholders understand the price of the shares they’re selling (if they choose to). 

The agreement also allows shareholders to make decisions about which outside parties can become shareholders in the future. 

A shareholders' agreement will also include:

• The number of shares issued.
• A capitalisation that outlines the shareholders and their percentage of ownership.
• Any restrictions placed on transferring shares.
• Any pre-emptive rights that current shareholders have for purchasing their shares to maintain their ownership percentages.
• Any details of payments in the event of a company sale.

A shareholders agreement is optional and is created by shareholders for shareholders. 

When creating a shareholders’ agreement there are a range of questions you should ask. We’ve formatted this in a checklist:

Shares, shareholders and transfer of shares 

1. In what proportions will the shareholders hold shares?
2. Will you include different classes of shares with different rights or will you use ordinary shares instead?
3. Does the company need to offer new shares in the first instance to existing shareholders in the proportions they already hold shares? 
4. Will directors or shareholders be given the discretion to block the transfer of shares or will it just be in certain circumstances? For example, can any transfer to a competitor or an external investor be blocked?
5. Will transfers between existing shareholders, to family members, to family trusts or to associated companies be permitted? There may be tax advantages to this, especially if the [transferee]OR [incoming shareholder?] is a lower-paid taxpayer. 
6. If shares are proposed to be transferred will they need to be offered in the first instance to existing shareholders in the proportion they already own shares? Will the price of the shares being transferred need to be agreed by the board or the other shareholders? 
7. Will there be a prohibition on shareholders creating a charge over shares?

Obligations of shareholders

• What amount of time will each shareholder devote to the business? Will it be full-time or part-time?
  

Directors

1. Are there certain requirements to be a director? For example, do they need to have a shareholding to become a director?
2. Who will be entitled to appoint a director? For example, will every shareholder have the right to appoint a director according to their shareholding percentage or by a general meeting?
3. Will there be a maximum number of directors?
4. Will directors have to sell their shares if they’re terminated?
5. Will the shareholders always be the same people as the directors?

Director meetings

1. What will the minimum number of directors be to hold a directors meeting to transact business validly?
2. How often should a director's meeting take place? 
3. When there are equal votes at a director's meeting should the chairman have a casting vote and will every director be entitled to one vote on any decision?
4. Can alternative directors be appointed by directors to attend and vote in board meetings in their place? 

Service agreements for directors

1. Will service agreements be required for the directors? These are recommended to regulate the relationship between the company and each director.

Shareholders and meetings

1. Is there a minimum number of shareholders needed to approve certain transactions?
2. When there’s an equality of votes in a shareholder meeting, should the chairman be granted a casting vote?
3. What will the company dividend policy be? 
   

Shareholders policy

1. What are shareholders' funding options? Is additional working capital required or will there be any long-term finance or loan capital?
2. Will every shareholder have access to all financial information? This can include management accounts, company records  and/or bank accounts. 

Shareholders Consent 

1. Will there be any circumstances or situations where consent of all or majority of shareholders is required? Circumstances or situations could include:
   1. Issue of new shares.
   2. Introduction of new shareholders.
   3. Alterations to share capital.
   4. Purchase of company’s own shares.
   5. Any financial assistance for the purchase of shares.
   6. Any change to the nature of the company's business or the commencement of a new business by the company.
   7. Expansion into a new geographical area.
   8. The signing of major contracts.
   9. Substantial sales of assets or disposal of business by the company.
   10. An amalgamation or merger.
   11. The formation, acquisition and disposal of subsidiaries.
   12. The charging of any assets of the company.
   13. Any borrowings in excess of the financial limit.
   14. Capital expenditure in excess of financial limit.
   15. The lending or giving of security or financial accommodation. 
   16. The appointment or dismissal of directors, employees or agents.
   17. The changing of directors and other employees' remuneration or varying any of the terms of their contract. 
   18. The lease, hire, purchase, acquisition and/or disposal of property or any other material asset. 
   19. The factoring and/or assignment of debts.
   20. Any alterations to the memorandum and articles.
   21. Any alterations to the company's status as a private company.
   22. Any winding up or any other act of insolvency or arrangement with creditors. 
   23. The making of any financial distributions by the company. 
   24. The acquisition of shares or assets or participation or joint venture by the company.
   25. The entering into unusual or long-term transactions.
   26. The entering into transactions with connected persons.

Non-competition 

1. After ceasing to be a shareholder will there be any non-competition covenants given by shareholders not to compete against the company for a specified period? For non-competition covenants to be enforceable they must protect the legitimate business interests of the company only and be limited to the geographical scope where the company trades, be for a specified duration and be confined to the nature of the business in question.  

Confidentiality 

1. During or after ceasing to be a shareholder are there any confidentiality clauses given by shareholders? 

Termination and/or death 

1. What are the circumstances in which the agreement ends? For example, termination of the shareholders' agreement for material breach of its terms, physical incapacity, bankruptcy or circumstances where the shareholder is also a director/employee and they leave the company or any other reason?
2. What are the consequences of a death or Termination Event?
3. Will every shareholder have the right to demand to be bought out or to buy out the other shareholder? 
4. Will there be a compulsory sale of shares? This means the other shareholders are allowed to purchase the outgoing shareholders' shares and the outgoing shareholder must sell their shares to the remaining shareholder or another person at an agreed price.

Good/bad leaver 

1. In your shareholder agreement, provisions can be made so that the departing shareholders' shares are valued on a different basis if they were a ‘bad leaver’. This doesn’t apply if they’re a ‘good leaver’. For example, a ‘bad leaver’ could be defined as a shareholder/director who has breached the terms of the shareholders' agreement or service contract or has left within an agreed period of time. 

Valuation of shares

1. What will the basis for the valuation of shares be on the departure of a shareholder either:
   1. Pro-rata (according to the percentage shareholding in the company and the value of the company).
   2. Minority (shares are discounted to reflect that they’re a minority holding).
   3. Are there any specific accounting principles that should be applied?
   4. Should the company be valued on its assets or its earnings?
   5. Should the potential future of the company be valued and how?
   6. Should the valuation be carried out by a specific accountant?

Payment for shares

1. Should the purchasing shareholder(s) be granted a period of time to pay for the shares sold by another shareholder?

Life insurance

1. Is life insurance required to cover cross options? This means shareholders have life insurance so that if one dies then the others have enough money from the policy to purchase the deceased shareholders’ shares from their estate..
2. Will there be a keyman insurance? These are policies insuring against death, injury, and ill health of directors/executives. 

Deadlock 

Deadlock provisions are typically only available for certain  joint venture arrangements and/or where the company is owned on a 50/50 or equal basis. Deadlocks are also usually a means to resolve fundamental disagreements between the shareholders. 

Arrangements in the event of a deadlock:

1. A cooling-off period - this can be a few weeks or months where nothing can happen.
2. Trigger - this is a specific time deadline whereby the deadlocks come into play.
3. Competitive bids for shares.
4.  Liquidation.

Sale of the company /business or a listing

In your shareholders’ agreement the provision to cover the circumstances when a controlling interest in the company’s shares is going to be sold to a third party and/or where the company is to sell a substantial part of the business to a third party and/or where the company is admitted for listing to a recognised investment exchange. 

For example ‘drag along’ rights could allow shareholders with a controlling interest in the company to force minority stakeholders into the sale on the same agreed terms. ‘Tag along’ rates will enable minority shareholders to join with other shareholders who intend to sell to a third party. 

1. When there is an offer for a shareholding of 50% or more, will the requirement be that 100% of the shares must be bought on exactly the same terms, failing which the company will not recognise the sale of 50%?

For further information or advice, get in touch with Legal Clarity today to see how we can support you in creating a comprehensive shareholders' agreement.