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Shareholder Agreement Considerations

Shareholder Agreement Considerations

If you are setting up a company with one or more other share holders then you need to work through all of these questions. It covers a number of topics that you may not have considered.

Chances are you are purely focusing on setting up the business and what everyone will be doing on day one. This ensures that you have the long term covered, and many of the “what if…” scenarios.

Shareholders wishing to exit business

  • Agreed valuation method
  • Timing of notice to exit
    • What is minimum notice that must be given of intention to exit?
    • If little notice is given to exit what impact does this have on those remaining in the business?
      • Cost & ability to find replacement employees / owners?
      • Potential for loss of customers without appropriate time frame for introducing new person
    • Will discounts on valuation apply if exiting earlier than minimum notice?
      • e. – minimum notice of exit 3 years – full business value
      • if notice given 2-3 years – 10% discount on valuation payout
      • 1-2 years – 20% discount
      • 0-1 years – 30% discount

 

  • What is the time frame available for remaining shareholders to pay out the exiting shareholder?  This may vary depending on the notice to exit period given.

 

  • Restraints of trade upon exit
    • Length of time of restraint
    • Area of trade
    • Financial penalty for non-compliance

 

  • Obligation / ability for remaining shareholder on whether they buy the shares from exiting shareholder – what if they can’t / don’t want to?
    • You don’t want situation where remaining shareholder blocks the person who wants to exit by not buying their share and not allowing sale to another party
    • Period of time from exit notice for remaining shareholder to consider purchase
    • Then sale to 3rd party option – approval by remaining shareholder needed
    • If no approval given then remaining shareholder forced to buy shares or business sold?

 

  • What do you do if an owner is absent from the business for greater than 12 months and not likely to return to business in short term (long term health problems with them or family members)? Should they still be an owner?

 

Buying / selling % shares

  • What is the time frame for this?
  • Is allowed to use cash to pay off debt, provide for future children needs, set up investments away from business, or must all extra cash be used to fund buying more equity in business?
  • Is  ability to pay off debt, provide future children needs and set up investments away from business compromised if incoming shareholder does not buy extra equity in a set time frame?
  • What is agreed valuation method for buying extra equity (I suggest in line with exit)
  • Is this reviewed annually?
  • What happens if does not buy extra equity in timeframe?
    • Can  pursue other shareholders?
    • will have a say in who this is but is ultimate decision left to?

 

Decision making

  • Voting power on decisions
  • Is this according to shares held; or
  • 1 vote per shareholder (i.e. equal, 1 vote each)
  • Very simple but important as relates to control of business

 

Insurance

  • Cross key insurance – pays out value of business to deceased estate in exchange for cancellation/transfer of shares in business (i.e. remaining shareholder does not have to find the cash – insurance policy covers it)
  • What if insurance policy does not pay out (suicide etc.), there is no insurance policy proceeds to pay out value of business
    • Do the other shareholders help wear this loss? or
    • Deceased family receives no value for their share in business
  • Income protection – key man
    • Personal or business cost?
  • Do you insure for spouses/children illness?
    • What is the approach in terms of time off (when all leave entitlements are taken) – long term health could see over a year away from business

 

Exposure to debt

  • What deals must require sign off by both directors (Value, risk etc.)?
  • What is maximum value on transaction individually can authorize?
  • What risk is borne by each shareholder?
  • Security for borrowings
    • Are the shareholders able to use Company assets as security for their business loans?
    • If so is this limited depending on shareholding?
    • Where personal guarantees are provided do they have a limit (if one person has more assets away from business they have more at risk)

 

Legal positions

  • Approach with Powers of Attorney upon death
  • Deceased director – their power of attorney may become a director of the business if not dealt with in the shareholder agreement
  • Need to review control a POA may have on business

 

Performance Monitoring

  • Define roles in the business
    • sales targets?
    • Client managing portfolios
    • internal responsibilities
  • factual measurements (to reduce emotion in assessment)
  • salaries v dividends
    • income splitting
    • cash flow needs – individuals and business

 

Hours of work

  • What is expected?
  • How many in the office?
  • Leave entitlements to be accrued?

 

Shareholder discretionary funds

  • Is there a set amount each year for “business expenses”?
  • Are there criteria around what this could entail?
  • Set limits on personal phone, internet & mv expenses

 

Family working in business

  • currently working in the business
  • Is this open to other shareholders family?

 

  • Do they have the skills to perform the role, how do you say no if they don’t have the appropriate skills?
  • Can 2 spouses working in the business impact on decision making between?
  • What happens if there is conflict between the spouse and another employee that impacts on the business?
  • Who manages performance, remuneration etc.