Posted by James Worrall, Partner
Managing shareholder relationships
It is often only when a dispute between them arises that shareholders come to look at their company’s articles of association. By this time, it is often too late to avoid a lengthy and costly battle to resolve the issue and the future of the company. Spending some time when relationships are good to discuss what will happen if things go wrong is time well spent. The company’s articles of association can be structured to provide some certainty when dealing with future disputes.
For example, if the relationship between shareholders breaks down to the extent that certain shareholders no longer feel able to work together, what should happen?
Most articles of association don’t contain a procedure to be followed in the event that one party wants to sell his/her shares. Bespoke articles dictate a strict procedure, including for determining the value of the shares being sold, and can set out that any shares for sale must first be offered to the other shareholders. The risk without this is that a shareholder opts to sell his/her shares to a third party leaving the remaining shareholders stuck with a new party they did not approve.
What should happen in the event of the death of a shareholder is another important point to consider.
Generally, in the absence of bespoke provisions in the articles of association, shares held by the deceased will pass under the terms of the Will to the beneficiaries even if they do not have a role in the running of the business. If, however, the articles provide for the death of a shareholder to amount to a “deemed transfer event”, the death prompts the right for the other shareholders to acquire the deceased’s shares at fair value and the estate receives cash for them, often to the benefit of all concerned.
The other useful document that shareholders should consider is a shareholders’ agreement.
Shareholders’ agreements can formally detail the obligations of the shareholders to each other and help to manage expectations. Shareholders’ agreements can dictate matters which require the consent of a certain proportion of the shareholders before the company can proceed, for example borrowing significant sums of money or disposing of assets.
For more information on company structures and constitutional documents contact members of our Corporate & Commercial team
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