February 16, 2023

Protecting Your Business

Written by Peter Lynn
Protecting Your Business

In the following article, we look at the value of having a shareholder agreement in place and the scenarios when it is, quite possibly, the most important document you have.

Shareholder Agreement: Exit Strategies 

A Shareholder Agreement is invaluable for governing the rights and responsibilities of shareholders to one another and to the company as a whole.

Generally, there are several provisions that all Shareholder Agreements should contain, including:

Pre-emption Rights

Otherwise known as ‘Rights of First Refusal’ or ‘Anti-dilution Rights’, these rights provide security for shareholders who do not want to see their shareholding percentage diluted, after an issue or transfer of shares.

This means that existing shareholders have the right to increase their shareholding in line with the percentage increase of the shares being offered. 

For example, if shareholder A holds 25% of the shares in the company, they must first be offered 25% of the newly issued shares or those to be transferred, before they can be offered to anyone else.

Drag-along and Tag-along

A Drag-along Right provides a majority shareholder with the right to force the minority shareholders to also sell their shares when a share transfer is contemplated. 

These rights are especially important where a share purchase is being negotiated, as they prevent minority shareholders from vetoing any potential deal.

A Tag-along Right provides protection to minority shareholders, as it offers them the option to ‘tag along’ to any deal where a majority shareholder is looking to sell shares. 

Succession Planning

Another key provision is to document the procedure to be used on the death or other exit of a shareholder from the business. 

The transfer of shares to an executive’s family member or other third parties may not be desirable for the existing shareholders. 

One practical solution to Succession Planning is a Cross-option Agreement. This would involve all shareholders entering into a life insurance policy where, on death, the proceeds would pass to the surviving shareholders. 

For more information or to review any agreements you currently have in place, call 01792 450010 or email [email protected] and click here for more – https://www.peterlynnandpartners.co.uk/company-commercial/