If you’re implementing an employee share scheme for your business you may wonder whether or not you need a Shareholders’ Agreement to govern the relationship between the shareholders.
Assuming you, as business owner, will retain a “controlling interest” i.e. more than 50% of the issued voting share capital of the company, you will retain one of the key powers in relation to your company: the power to hire and fire the board of Directors. After all, it is the Directors who are responsible for the day to day running of the business so this enables you to retain control of management. There are, though, a number of things that the board of Directors does not control which you may want to consider further. Two of the key areas are described below
1. In order to change the Articles of Association of the company you would need to pass a special resolution. A special resolution can only be passed by shareholders holding not less than 75% of the voting share capital.
2. New share issues will typically be caught by section 561 of the Companies Act 2006. This means that any new shares must first be offered to the existing shareholders pro-rata to their shareholdings. This can be waived by the passing of a special resolution.
Whilst company law goes some way to protect your position there are other protections that you may want to seek. These could be included in a Shareholders’ Agreement or more typically the Articles of Association:
1. A buy back right
If you have read some of our previous blogs on the subject of employee share schemes you will have noticed that we talk a lot about share buybacks in the event that an employee shareholder were to leave. By including such provisions in the constitution of the company you would have the right to ensure that the shares held by an employee could be purchased by the company (or you/any other shareholders) in the event that they leave. Without such provisions you would need to negotiate with the employee and, if a price could not be agreed upon, they could end up remaining as a shareholder of the business (receiving dividends and a capital return if you eventually sell).
2. A drag-along right
Under company law if there is an offer to purchase 90% of the share capital of the company you can require the remaining 10% shareholders to also sell their shares. This is key as it is not often the case that a buyer would want to acquire anything less than 100% of the shares. If your employee shareholders are to hold more than 10% (and in any event to avoid the complexities of the standard company law position) you will likely want a bespoke drag-along right in your constitution.
All of the above provisions can be included in bespoke Articles of Association of the company without the need for a separate Shareholders’ Agreement to keep the constitution simpler. Beware of putting in place a Shareholders’ Agreement that is unnecessarily complex for you and your business.
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