Every private company limited by shares has “articles of association”. Articles are the rules about running the company with which all shareholders and directors must comply with. Most companies are formed with standard or model articles which are a template set of rules. However they to fail to address more complex issues affecting a company, and as such, are a case of “one size fits all”; which is not ideal. Accordingly many owners of companies enter into a shareholders agreement. The easiest way to explain the importance is for you to consider the following questions:-
Are you clear on shareholders rights?
Broadly speaking you can have as many different types of shares as you want; play around with the rights attaching to them to make them as specific as you want. Can a shareholder vote? Receive income? Share in the spoils on a sale? Are these rights equal or not?
How are directors appointed or removed?
Usually only either a simple majority vote of the directors or the shareholders is required to appoint a new director or remove an existing one. Do you want more control on appointment? Do you want more protection against removal?
Do you have any decision making power?
Directors run the Company. Shareholders only own it. Therefore most important decisions are taken by the directors, and to push those matters through you require only a simple majority. Some (albeit limited) decisions have to go to shareholders, but these usually again only require a simple majority. Wouldn’t you like to provide that certain key decisions cannot be taken without your consent? You can increase the percentage of votes required either for directors or for shareholders to pass through key issues. You could bar them from being passed unless you agree.
How do you remove a shareholder?
Nothing in “model” articles compels a shareholder to sell shares if he doesn’t want to. Imagine a shareholder who is also a director and an employee; if his performance is poor, employment law provides a mechanism for lawful termination as an employee and with 51% of the votes you can remove him as a director, but unless you have provisions to the contrary you cannot compel him to sell his shares. Don’t you want to remove him?
What happens if a shareholder dies?
If a shareholder dies, then their shares will pass in accordance with their will or the rules of intestacy. This is usually a spouse or children. You may like your co-shareholders …. can you say the same about their wife or their kids? We can provide that the estate and surviving shareholders exchange shares for cash thus preserving the business and providing for beneficiaries for the future. Regard must be had to the value of the shares and how you will fund that. Insurance can be used for some events e.g. critical illness and death, or you can give the remaining shareholders a period of time over which they can pay for the an outgoing shareholders shares.
What if we can’t agree?
The most common phrase heard by lawyers is “we won’t fall out”. Unfortunately it happens and generally an absence of the necessary votes means a decision is simply not passed. If there is no procedure for what should happen in the event of a deadlock of directors and shareholders you are in the lap of the litigation gods, with much mud being thrown around and an end result of big bills and a company worth much less than when all the “fun and games” began. It is important to have an appropriate procedure to deal with such situations. You can select from quite a few variations on this theme, involving ridiculous terminology such as Russian roulette or Texas shootout (all designed to make the life of the average corporate lawyer much more interesting!). Remember winding up the company usually requires a majority vote as well!
What if you are Charles Xavier?
If you are Professor X and have Wolverine and his band of X-Men at your disposal, if any issues of the type raised above crop up, you can travel back in time through the minds of mutants to rewrite history. If you’re not able to call on such Marvel powers you are left with the human solutions of time, effort and money being spent in haggling. Therefore, in summary, prevention is better (and cheaper) than cure.