The importance of Shareholders’ Agreements
A recent High Court case has again highlighted how important it can be for shareholders to have the right agreements in place to govern the relationship between themselves and the company, and set out processes to be followed in prescribed circumstances.
Brothers Angus, Allan and Alistair McCallum-Toppin founded AMT Coffee Limited (AMT) in 1993 from a single coffee cart. AMT were at the forefront of the boom in British coffee shop culture and enjoyed huge success. The company is now reportedly valued at £20 million.
At the beginning the brothers paid themselves equally, but after Angus’s untimely death from bone cancer in 2007 the surviving brothers largely ignored Angus’s widow, Lucy, and his family. Lucy and Angus’s estate were cut out of any business decisions and the family did not receive any payments from 2007, other than a £121,000 pension contribution.
Lucy’s decade-long challenge to get a fair share of the income led to her being branded a “gold digger” by one of the brothers. However, Judge Paul Matthews said that after Angus’s death “Allan and Alistair used the company as a piggy bank to make personal expenditure at a high level”. He found that Allan and Alistair had been unfairly prejudicial to Lucy and Angus’s estate as minority shareholders, and ordered them to pay up to £7 million to Lucy for Angus’s shares.
Despite the large sums and media coverage involved, the circumstances leading to the AMT case are all too familiar – a group of friends or relatives have a great idea, they go into business together, the business does well and grows beyond their wildest expectations, but then a dispute (usually about money) arises and what was a successful relationship can sadly deteriorate into squabbling and acrimony.
“Death never takes a wise man by surprise; he is always ready to go” – Jean de la Fontaine (1621-1695) – so how can a shareholder protect their interests and those of their family whilst ensuring that the company runs smoothly in all eventualities?
Shareholders’ Agreements and Cross-Option Agreements
A Shareholders’ Agreement (SHA) goes a long way to preventing disputes from spiralling out of control. It’s essentially a contract between the shareholders of a company (although it does not have to be between all of the shareholders of a company) with the purpose of protecting the longevity of the company by providing a framework for decisions to be made or for disputes to be resolved by the shareholders.
An SHA will, amongst other things:
- set out a shareholder’s rights and obligations;
- define how decisions are made;
- describe how a company is going to be run;
- provide protections for minority shareholders and the company;
- provide greater confidentially than publically available company documents such as the Articles of Association;
- regulate the sale of shares in the company; and
- define triggers for the mandatory transfers of shares in certain situations.
Whilst an SHA can provide for the mandatory transfer of shares in the event of the death of a shareholder, a Cross-Option Agreement will create a series of options through which the surviving shareholders of a company can purchase, or be forced to purchase, a deceased shareholder’s shares from their estate at an agreed or fair value. These options are designed to benefit both the deceased’s family and the surviving shareholders; the family receive fair price for the shares, and the surviving shareholders retain control of the company.
When should I enter into an SHA or a Cross-Option Agreement?
The best time to enter these agreements is at the beginning of the business relationship and to consider reviewing and updating the documents as and when the business progresses and/or further investments are made into the company. Whilst there are no time limits for putting an SHA or Cross‑Option Agreement in place, it is certainly advisable to ensure appropriate documentation is in place prior to the death of a shareholder and prior to any disputes arising between the shareholders.
If you are considering investing in a business as a shareholder, or if you are already a shareholder and want to review the protections you have in place, please seek appropriate legal advice.