A shareholder agreement is an indispensible component for the running of an efficient business. A shareholder agreement is highly desirable for a company as it clarifies the rights and entitlements of each party. It creates a good healthy debate among shareholders who share a common business goal of making a success of their new venture.A written shareholder agreement allows the parties to have certainty and clarity at all times as it sets down ground rules for avoiding disputes while providing a mechanism for dealing with them if they do arise.
Although it is an option for the company to put many of the matters commonly inserted in shareholders agreements in the Memorandum of Association or Articles of Association, these documents are available on the public register and therefore they are not confidential. A shareholder agreement on the other hand is a private document. Shareholder Agreements do not have to be registered in the Companies Registration Office and as such avoid being open to scrutiny by the public at large.
Common terms written into Shareholder’s Agreements include:
Shareholder’s Agreements usually provide for mediation and/or arbitration in respect of disputes within the Company. This is particularly useful in order to keep any commercially sensitive or embarrassing information away from the remit of the Courts. Arbitration is not necessarily cheaper than going to Court but at least any hearing will not be held in public or be brought to the attention of the Revenue Commissioners.
The Shareholder’s Agreement will in the normal course set out a mechanism to deal with deadlock or stalemate situation within the Company, e.g. the shareholders cannot agree whether to borrow a large amount of money to build a new factory and no compromise can be reached. Usually Shareholder’s Agreements will contain a put and call option which effectively means that in the event of deadlock or dispute, one shareholder may offer to buy out the other shareholder at say €10.00 per share. The other shareholder can either accept this offer or purchase the other Shareholder’s share for that same amount. This is often called a Russian Roulette clause, as the offer a purchaser makes to the other shareholder must equate with the amount which the offeror would accept for selling his shares in the Company.
Death of a Shareholder
If a shareholder dies there is no automatic right for the surviving shareholder to purchase the deceased shareholder’s share. Therefore, a Shareholder’s Agreement will frequently provide that the surviving shareholder shall be entitled to purchase the deceased shareholder’s share at a price which is calculated using an agreed valuation mechanism e.g. a multiple of profits or an Auditor’s Valuation. Very often the shareholders will insure each others lives, so that in the event A dies the life insurance proceeds will be paid to B who in turn will use the money to purchase A’s shares from his personal representatives. This form of mutual life insurance must comply with certain Revenue Commission guidelines in order to avoid certain unforeseen inheritance tax consequences.
Sale of Shares
If your fellow shareholder decides that they wish to sell their shares and cease involvement in the company, then the Articles of Association or the Shareholder’s Agreement should provide that the shares must first be offered to the other shareholder first before being offered for sale outside the company. Normally, the outgoing shareholder will not be entitled to sell the shares to an outsider at a price that is less than the price the continuing shareholder was willing to pay to the outgoing shareholder. This effectively prevents the outgoing shareholder from refusing a reasonable offer from the continuing shareholder and in turn selling the shares to an outsider for a lower price than the continuing partner was willing to pay.
The Shareholder’s Agreement may also provide for a non-compete clause whereby each shareholder/director agrees not to compete with the Company during their involvement with the company and for a limited period after the cease involvement. This is particularly important where a shareholder/director leaves and he or she could use insider knowledge to set up in direct competition to the Company.
If required the Shareholder’s Agreement can set out the Dividend Policy of the Company i.e. the amount of dividends that should be declared out of the profits of the Company. For instance, you might decide that any profits in a particular year in excess of say €100,000 would be paid out to Shareholders as dividends. It should be borne in mind that taking dividends may not be the most tax efficient way of taking money out of the Company. Morgan McManus Taxes Group can advise you on the most appropriate tax method.
Salaries & Pension Contributions
The Shareholder’s Agreement may also set out guidelines and limits on Director’s salaries and pension contributions. This may be particularly important where both parties are not working in the Company full time.
Company law generally gives the holders of 50% of the shares almost complete control over the affairs of the company. A shareholders agreement can increase shareholders rights and can be negotiated to include whatever whatever the shareholders as a whole agree.
Morgan McManus Solicitors draft, revise and structure new and existing agreements, tailoring them to meet the requirements of your business and particular circumstances. If you would like to discuss any of the above in further detail, contact our office to make an appointment with one of our experienced Solicitors.