You should consider a shareholders' agreement as a "pre-nuptial" agreement. You are trying to reach a consensus in advance of a possible breakdown in the relationship. 1 in 3 marriages fail and the failure rate for business is much higher. Negotiating with your business partners ought to be a lot easier than with your spouse as the "don't you love me" doesn't come into it!
Here is a non-exhaustive list which you could use as a limited agenda for discussions between proposed or existing shareholders. This should be followed by detailed legal advice and then a written agreement between the parties.
1. Alternatives: limited company, partnership or limited liability partnership etc
Assuming you select a limited company:
2. Purpose of venture. Business plan. Expectations.
3. Share split
a. Implications of key thresholds: 5%, 10%, >25%, 50%, >50%, 75%
b. Deadlock vs controlling stake vs negative control/ability to block
c. "Ordinary", "Special", "Written" resolutions
d. class: ordinary, preferred, redeemable etc
e. dilution (now and future)
4. Directors
a. Day-to-day management
b. How many
c. Right to appoint/remove
d. Chairman; casting vote?
e. Service agreements: salary level?
5. Company name, company secretary, registered office, accountant/auditor
6. Finance
a. Share capital vs debt
i. Allotment of new shares
ii. Cash/non-cash
iii. Director's loan
iv. Second round
b. Security? Debentures/charges. Personal guarantees. Indemnity to each other?
c. Working capital
d. Bank mandate: joint signatories?
e. Dividend policy
i. consider minimum % profits to be distributed or retained if no agreement
ii. dividend versus salary balance
7. Business plan and budget incl cash flow; agreed intervals
8. Exit strategy (the important one!)
a. Share valuation mechanism
b. Discount/premium for certain stakes
c. Ability to transfer part or whole stake only
d. Staggered exit – tax and valuation implications
e. Trigger events eg
i. Death/serious illness
ii. Divorce
iii. Trade sale
iv. One party wishes to leave
f. When to wind company up
g. Pre-emption rights
h. Ability to transfer to spouse/children
i. "Shoot-out" provision: party receiving notice must elect either to purchase shares of other party or sell its shares to that party
j. "Bring-along" provision: transferor must require third party purchaser to offer to buy also the other party's interest at the same price per share
k. "Drag-along" provision: selling party can oblige other party also to transfer its shares to the same purchaser
l. Put/call options included at outset
9. Matters requiring unanimity
10. Dispute/deadlock resolution mechanism (Ultimate sanction: specific right after minimum period for either party to call for liquidation)
11. Personal tax planning issues affecting structure
12. Intellectual property
13. Non-compete/non-solicitation
14. Confidentiality
15. Life/term assurance: key man, cross option etc
As you can see there is a lot to consider when you go into business with some one. Better that you discuss these issues up front. We have run through this list with numerous clients and the most frequent feedback is: I really didn’t think about that. Thanks. Hopefully the answers you come up with don’t mean that your business relationship founders immediately. If you find it difficult to reach a consensus with your business partner now on key issues let this be an alarm bell. Consensus is often more difficult to achieve further down the road.
Martin Truman is a qualified solicitor who advises clients all over the UK. You can find out more about Shareholder Agreements and how best to draw one up for your company from the Shareholder Agreement section of his legal advice web site.
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