In a private company, particularly one with a relatively small number of shareholders who also manage the business, the best method is usually a shareholders' agreement. As well as providing an agreement covering the most likely causes of dispute, the process of preparing the agreement helps shareholders to work through the key issues.
Amongst other things, a good agreement will cover:
- The financing of the company.
- Dividends, directors' fees and salaries.
- Responsibilities for different areas of the business.
- What the company's key objectives are.
- What authority is required to take certain actions.
As far as possible, the agreement will anticipate potential future issues: for example, what will happen if the company needs to raise additional financing, enter into high value contracts or engage a number of highly paid new employees. The agreement will specify that a majority, or possibly all the shareholders, need to give approval before the company can be bound.
The agreement will also cover how a shareholder can realise his or her investment in the company: for example, any restrictions on selling shares, and how the shareholding will be valued if the other shareholders or the company have the right to buy it. This is particularly important where a shareholder's exit from the company is not amicable and a valuation of the shares cannot be agreed. A standard shareholders' agreement would be expected to provide a timetable for sale, and allow for the appointment of an independent third party to value the shares.
In addition the agreement will deal with 'deemed transfers'. This will be a list of events which automatically trigger a requirement for a shareholder to offer to sell his shares to the other shareholders and sets out the sale process. For example, this might include the death of a shareholder, or the departure of a director with a shareholding.
