Checklist for Preparing Shareholder Agreement (Z142)

Checklist

This Checklist highlights some of the issues you will need to consider when forming a new company and establishing an agreement between the shareholders dealing with how the company is to be run and the rights and duties of the various shareholders.

At the back of the Checklist is a Worksheet which you can use to set down the main details that will be needed to go into the Shareholders Agreement and which can be used as an aide memoire when deciding on how the shareholders agreement is to be structured.

And remember – ContractStore has more than one Shareholders’ Agreement template that you can buy online and download.   Click on this link to see the list of  our shareholders’  agreements and other business structures 

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Shareholders’ agreements tend to be private arrangements between the shareholders in a company that are not appropriate for inclusion in the public documents of a company, i.e. those documents that are filed at the relevant registry. Note, however, that in some countries it may be necessary to consider whether, from a legal perspective, registration is necessary to ensure enforceability of the terms of the shareholders’ agreement in relation to the affairs of the company to which it relates.

1. THE PARTIES

It must be decided whether all shareholders in the Company are to be parties to the Agreement, or whether some only, to reflect any particular agreement that they may have. Further, thought must be given to whether the Company itself is to be a party to the Agreement as this will give the shareholders rights against the Company for any breach by it of obligations that it undertakes in the Agreement.

2. THE COMPANY

The usual form of company is a limited liability company; note that different jurisdictions will have different structures or types of company, and advice should be taken as appropriate. Matters of particular importance in relation to any company are:

2.1 The number of shares to be taken by each shareholder and whether the shares carry any special voting rights;

2.2 Whether the shares carry any particular right to appoint members of the board of directors.

3. CAPITAL AND BUSINESS PLAN

Any venture will require the injection of capital by the Shareholders. It must therefore be determined at an early stage what capital will be required, who will contribute it, and when it will be required. A business plan is therefore important and it is usual to attach one to a shareholders’ agreement for a new company. Similarly, the parties may wish to put in hand a feasibility study, or perhaps this will have been done in the pre-shareholders’ agreement stage.

4. MANAGEMENT

Management of a company is generally undertaken through the board of directors; it is therefore important that the shareholders agree how many directors there are to be, who the first directors are, how they are to be appointed and removed and whether the holders of different classes of shares have any particular power to appoint them. It is usual for each of the principal shareholders to have the right to appoint at least one director to the board and, where a shareholder is an individual he may also be a director.

Once appointed, directors may be given authority to determine how often they meet, the quorum for meetings, how their decisions are made and other matters relating to, e.g. the conduct of their meetings. Alternatively, the shareholders may wish to determine these matters themselves and set out the rules in the shareholders agreement. This is especially likely to be the case when, for example, there is one major shareholder who wants to be sure that only resolutions that have his vote will be passed by the board or at shareholders’ meeting.

Another aspect of management which the shareholders should address at the outset is the extent of the directors’ powers; the shareholders may wish to reserve certain important matters to a decision of the shareholders in general meeting of the Company. These reserved matters may cover, for example:

4.1 Company borrowings or transactions generally in excess of a particular limit;

4.2 joint ventures with other companies;

4.3 any changes in the scope or nature of the Company’s business;

4.4 the issue of any new shares in the Company or any change in its capital structure;

4.5 the choice of auditors;

4.6 the commencement or settlement of litigation.

5. TRANSFER OF SHARES

5.1 Each shareholder may wish to prevent other shareholders from charging or pledging shares in favour of third parties;

5.2 Each shareholder may wish to prevent other shareholders from disposing of their shares to third parties without having first offered them to existing shareholders;

5.3 The shareholders may also wish to provide that in certain circumstances, e.g. the bankruptcy, death or permanent incapacity of a shareholder, then that shareholder’s shares are to be offered to the other shareholders. It may be prudent also to consider taking out insurance so that funds are available to the company or the other shareholders to buy the shares of a member of the company who dies or becomes critically ill. Where a limited company is a shareholder, it is sometimes a term of the shareholders agreement that if the control of that shareholder changes – e.g. if the shareholder company is taken over – then the shareholder must sell its shares and leave the Company.

5.4 The shareholders agreement will usually contain a clause setting out how shares are to be valued when a shareholder leaves and sells his shares to the remaining shareholders.

5.5 In the UK, it is usual for tax reasons to give shareholders the option, but not the obligation, to acquire shares of a deceased shareholder.

6. FINANCING

This important aspect should be carefully considered at the outset of the venture, and shareholders might wish to agree:

6.1 As to how further capital requirements are to be provided, i.e. by the shareholders themselves or through loans from third parties;

6.2 Whether security for loans will be granted and, if so, the type of security that will be provided, e.g. by way of charges over assets, or shareholder guarantees.

7. DIVIDEND POLICY

Shareholders often provide in the shareholders’ Agreement for:

7.1 the means of calculating net profits;

7.2 a percentage of the net profits that must be distributed annually;

7.3 any restrictions on distribution of net profits – e.g. no distribution until certain loans have been repaid.

8. DURATION

Agreements will generally contain provisions relating to their duration, and how they may be terminated. It is usually also wise to consider whether the Agreement will continue when new shareholders are introduced – in these circumstances, it would be sensible to make approval of a transfer of shares conditional upon the new shareholder specifically agreeing to abide by the terms of the Shareholders’ Agreement. In the UK this is often achieved by the new shareholder signing a deed of adherence. (See document A193 on our website for a suitable template.)

9. CONFIDENTIALITY

The Parties may wish to impose duties on each other not to disclose to third parties their own and or the Company’s confidential information; this obligation is usually expressed to endure for a period of time after the termination of the venture or the transfer of shares by a particular shareholder.

10. MANAGEMENT DISPUTES

When, in relation to certain specific issues of importance, the shareholders (either through their directors on the board or in general meeting) cannot agree, what occurs is what is known as a “deadlock”. It is often agreed by the shareholders at the outset what will be done in such a situation. A solution that is often adopted is for a shareholder to offer to sell its shares or purchase the other shareholders’ shares at a particular price. These solutions are sometimes known as “Russian Roulette” or “Texas Shootout” provisions.

11. DISPUTE RESOLUTION AND GOVERNING LAW

It is usual to agree a method of resolving disputes between the shareholders that arise out of the Agreement. The shareholders may wish to have disputes resolved by arbitration, or leave it to the courts. Sometimes they may have disputes referred to mediation or disputes on a particular topic – e.g. financial matters – to be determined by an independent expert. It is also usual to select the system of law by reference to which the Agreement will be construed and the jurisdiction in which the dispute will be heard, if no arbitration clause is incorporated in the agreement. We have free documents on our website dealing with these topics – Z138, Z139 and Z140.

WorkSheet for Shareholders Agreement

This document can be used generally when preparing details for inclusion in a shareholders’ agreement. It can also be used in conjunction with ContractStore’s 2 party shareholders’ agreement or our multi-party (3 0r more shareholders) agreement.  The easiset way to use this Worksheet is to download a free copy.

Details of shareholders who will be parties to the Shareholders Agreement

Full names, designation (i.e. Mr, Mrs, Miss etc.) and address of each shareholder (residential address for an individual or registered office if the shareholder is a company):

1. ……………………………………………………………………………………………. ……………………………………………………………………………………………………………………………………………………………………………………………

2. …………………………………………………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………

3. ……………………………………………………………………………………………………………………………………………………………………………………………. …………………………………………………………………………………………

4. …………………………………………………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………
Will the company also be a party to the shareholders agreement? Yes/No

Details of Company

A. If the company has not yet been incorporated:

Proposed name……………………………………………………………………

Alternative name(s):………………………………………………………………
(if the proposed name is already registered)

Proposed address of registered office

NB: If you are also planning to set up a website and you want the website name and company name to be the same, it is important to see if the domain name is available, as if it is not, you might wish to have another name for the company

B. If the company already exists
Name of company…………………………………………………………..

Date of incorporation……………………………………………………….

Registered Number…………………………………………………………

Registered office …………………………………………………………..

Brief Description of the main business of the company:
……………………………………………………………………………………………

Share Capital

Proposed/Current share capital:

Classes of shares (ordinary, preference etc.)……………………

Number of shares in each class………………………………….
Nominal value of each share ……………………………………

Proposed/Current issued share capital:

Name of each shareholder & number of shares of each class to be subscribed for/already held by each shareholder.

Name:…………………………………No. of shares………………..
Name:…………………………………No. of shares………………..
Name:…………………………………No. of shares………………..
Name:…………………………………No. of shares………………..

Are all the issued shares(to be) fully paid up? If not please specify details
………………………………………………………………………………………….
………………………………………………………………………………………….

Are there plans to increase the share capital and/or to issue more shares that need to be taken into account in the shareholders agreement? If so please specify:
………………………………………………………………………………………….
………………………………………………………………………………………….

If extra capital is needed from the shareholders in future, is it the intention that this will this be provided by the existing shareholders pro rata to their existing shareholdings? Yes/ No

Loans & Guarantees

Are there (to be) any loans from shareholders to the company? If so, insert brief details:

………………………………………………………………………………………….
………………………………………………………………………………………….

If guarantees from individual shareholders are required by the bank or other third parties, will these be provided by shareholders proportionately to their existing shares – and if not, what arrangements will apply?
………………………………………………………………………………………….
………………………………………………………………………………………….

Profits Policy

If the agreement is to specify this, will the policy be to generate profits and to distribute those profits by way of dividend? Yes/No

If No, set out the policy here………………………………………………………………………….

Directors, Chairman, Company Secretary

Who will appoint the directors? For example will each shareholder appoint one director or will the shareholders as a group appoint the directors?
…………………………………………………………………………………………………………….

Full Name of each Director (and residential address if the director is not also a shareholder):
1……………………………………………………………………………………………..

2…………………………………………………………………………………………….

3…………………………………………………………………………………………….

4…………………………………………………………………………………………….

Name of Chairman………………………………………

Name (and address) of Company Secretary……………………..………………………..
…………………………………………………………………………………………….

Can a Director appoint someone else (maybe another Director) to attend and vote at meetings if he is unable to attend? Yes/No

Meetings and Decisions of the Board

How many directors are needed for a quorum at a meeting of the board? …………………………………

Is it necessary for a quorum to include any particular Director? If so, insert details
………………………………………………………………………………………….

How frequently should meetings of the board be held? Monthly/quarterly etc
……………………………………………………………………………..
Will each director have one vote at meetings? Yes/No
(If no, what are the voting arrangements?)……………………………………………………………..

Will the Chairman have a casting vote if there is an equal division of votes of directors for & against a resolution? ……………………………………

Are there any matters requiring the approval of all the Directors or shareholders, as opposed to majority approval, or are there any matters which require the approval of a specific named director or shareholder?
……………………………………………………………….

It is common to reserve certain matters for a decision of the shareholders and/or require unanimity or a special majority of directors/shareholders. These could include the following:

• Borrow money

• Incur expenditure beyond the annual approved Budget

• Create any security over the assets of the company

• Make any loan or give any credit

• Give any guarantee

• Sell any material assets of the Company

• Make any commitment involving expenditure in excess of £……..

• Buy or lease land or buildings

• Alter any rights attached to any class of shares in the company

• Appoint any agent or representative

• Appoint senior employees or dismiss any employee.

• Form any subsidiary company or joint venture

• Commencing litigation against third parties

Conduct of Business

What will be the head office address of the company?
………………………………………………………………………………………………………………

Business Plan: Will a Business Plan be attached to the Agreement? Yes/No

Will the company appoint a managing director/chief executive? Yes/No

Does any director or shareholder have any special arrangement with the Company (e.g. owning a building used by the company for its business)
If so give brief details…………………………………………………………………..

Will the working directors have employment contracts with the Company? Yes/No
(If yes, ContractStore can provide a template)

Bankers

Name and address of the bankers of the Company………………………………..……………………

Will payments from the bank account require more than one signature and if so is this above a certain limit and what is the limit?
……………………………………………………………………………………………………….

Accountants/Auditors

Name and address of the accountants/ auditors of the Company
)……………………………………………………………………………………………………
……………………………………………………………………………………………………..

Are monthly management accounts to be prepared? Yes/No

What is the Accounting Reference Date for the Company? …………………………………………

Will all shareholders have access to the books and accounts if required? Yes/No

Transfers of Shares

It is usual to restrict any shareholder from transferring shares in the company to a third party without the written consent of the other shareholders. If this is not the case, specify details here where a transfer is to be permitted (e.g. from a shareholder to his wife/child). ……………………………………………………
……………………………………………………………………………………………………………..

If a shareholder disposes of all his/her or shares in the company, should that shareholder be restricted from carrying on business in competition with the company? Yes/No

If a shareholder wishes to dispose of his/her shares, will the other shareholders have pre-emption rights (i.e. the option to acquire the shares of that shareholder on a pro rata basis)? Yes/No

If so, it is usual for the price to be fixed by agreement but if agreement is not possible, then the accountants will determine the price on a fair value basis – if some other arrangement is required, please specify ………………………………………………………………

If a shareholder dies or becomes critically ill or incapacitated, , will the remaining shareholders have an option to acquire that individual’s shares? Yes/No

If a shareholder dies will the executors of his/her estate have an option to require the sale of the shares to the company or to the other shareholders? Yes/No

Will insurance be taken out by the company/shareholders to provide a fund to allow for the purchase of a deceased or incapacitated shareholder’s shares? Yes/No

If Yes, will the company or the shareholders acquire the shares?…………………………………………………
(A company may in certain circumstances buy back its own shares for cancellation but the company must be solvent and various formalities are required)

Default

Will the shareholders agreement provide that a shareholder who commits a serious breach of the agreement or becomes bankrupt has to sell his shares to the other shareholders and cease to be a party to the agreement? Yes/No.

If Yes, are there any specific grounds for expulsion – e.g. failing to meet a call for extra capital within a specified period?

Deadlock

If there is a fundamental disagreement between the shareholders, the shareholders agreement can contain provisions dealing with a deadlock which usually provide for some method of resolving disputes such as mediation, but if this does not work, then ultimately a disgruntled shareholder may have the right to force a sale of his shares or the purchase of the other shareholders’ shares or the dissolution of the company.

Is a deadlock clause required here? Yes/No

Duration of Shareholders Agreement

Is the shareholders agreement to have a fixed duration or to continue for so long as the shareholders want it to?………………………………………………………………………………………………..

Governing Law & Disputes

The shareholders agreement will usually specify that the law of the country where the company is incorporated will apply. Disputes can either be referred to the courts or be finally settled by arbitration – which has an advantage of privacy: shareholders may not want to have the risk of publicity that can exist with court proceedings. Providing for mediation of disputes can also be useful.

Notes

1. In the case of an existing company, whoever drafts the shareholders agreement should be given a copy of at least the Memorandum & Articles of the Company and a copy of Certificate of Incorporation (including any certificate of change of name)

2. Usually the shareholders agreement will state that the terms of that agreement take precedence over the Articles of Association but it is best to try to avoid any conflict or discrepancy.

3. Any other relevant documentation or information should be given to the lawyer or other person responsible for preparing the shareholders agreement.