Key Issues for Shareholders when Starting a Business.

Key Issues for Shareholders’ when Starting a New Business.

This guide is intended to highlight some of the key matters that need to be considered by shareholders on the establishment of a new Company.

It may be helpful at the outset to mention the distinction implicit in company law between “management decisions” and “ownership decisions”.

The Articles of Association will invariably provide that the business of the Company is to be managed by the Directors.

Accordingly, day to day management decisions will be decided upon by the Directors who will make decisions based on a majority vote. In the event of deadlock, the Articles frequently provide that the Chairman shall have a second or casting vote.

Accordingly, the Board by majority vote can decide to take on or dismiss employees (including terminating the contracts of employment of Executive Directors), decide to acquire or dispose of premises and to enter commitments of a capital or income nature.

Ownership decisions on the other hand are made by the shareholders in general meeting. One of the key powers of the shareholders is the power to appoint and remove Directors (although the Board usually can fill casual vacancies). Other matters reserved to the decision of the shareholders include increasing and authorising the issue of additional share capital, approving each year’s audited accounts and any recommendation by the Directors as to payments of dividend, changing the constitution of the Company and decisions to wind-up the Company. Some of these matters require approval by a 51% majority of shareholders who attend and vote, others require a 75% majority.

Show More

Minority Protection

In view of the company law position noted in the introduction it is sometimes considered appropriate by shareholders to enter in to voting agreements. These may provide for a different majority (or perhaps unanimity) in relation to certain (or perhaps all) management or ownership decisions. Such agreements may blur the distinction between management issues and ownership issues. Whether an agreement to vary the operation of general company law on these matters should be entered into will need to be carefully considered by the promoters of the new Company in conjunction with their professional advisers.

There is a danger that an over-elaborate voting agreement may lead to an undesirable deadlock. Attached to this memorandum are two annexures which list some of the key ownership and management issues which may be the subject of a shareholders agreement.

Each Company will be different and there will rarely be an “off the peg” solution. However, it is worthwhile making the following general observations: –

(a) An institution investing in a new Company (perhaps in the context of a management buy-out or buy-in) will frequently be in a minority shareholder. Invariably they will seek for themselves undertakings from the other shareholders that certain ownership or management decisions (as listed in the annexures) will not be made without their written consent (or perhaps the consent of a Special Director appointment by them at a relevant Board Meeting). If the institution holds a strategic or “Balancing” shareholding the other shareholders may well be content to rely upon the decision of such institution to resolve any disputes between them. Indeed, an institution will be unlikely to agree to enter into a voting agreement to support other minority shareholders.

They might also be wary of voting agreements between other minority shareholders which for example, entrench a particular shareholder on the Board. Accordingly, the points made below will often only be relevant in the context of a Company without institutional shareholders.

(b) A deadlock structure can be devised for a “partnership” Company (even if shareholders do not hold shares equally) whereby shares are designated as “A” and “B” ordinary shares. Each class of shares has the right to appoint (say) two Directors (“A” Directors and “B” Directors). The Chairman’s casting vote is excluded, and it is stipulated that no meetings of the Board or General Meeting are quorate unless an “A” Director and “B” Director and “A” Shareholder and “B” Shareholder as appropriate are present. Similarly, no resolutions (or perhaps resolutions on certain key issues) are to be validly passed without the affirmative vote of “A” and “B” Directors or shareholders as appropriate.

The structure can be adopted for companies with three or more shareholders by creating “C” and/or “D” ordinary shares.

(c) A voting agreement can be entered into whereby certain shareholders will vote to ensure that they each have a nominated Director on the Board. Having the right to a Director on the Board (and accordingly access to confidential information) can be a powerful right.

(d) Voting agreement can be entered into whereby certain key (or all) ownership and/or management issues require the written approval of all or a specified majority of shareholders.

Show More

Unfair Prejudice

Provision exists under Section 994 Companies Act 2006 for minority shareholders to apply to the Court if the affairs of the Company are being conducted in a manner unfairly prejudicial to the interests of its members generally or some part of its members.

Such an action might be considered if the Directors are running the Company without regard to their fiduciary duties, or if, in a “quasi-partnership” Company, a director/shareholder’s employment contract is terminated. If such conduct is proved the Court has a wide discretion as to the orders it may make.

These include orders as to the conduction of the Company’s affairs.

Frequently, however, the order is that the majority shareholders must purchase the shares of the minority shareholder at fair value.

Frequently, particularly where the share capital is broadly held (or where perhaps an institutional shareholder holds the balance of power or a strategic stake), shareholders will dispense with any voting agreement of the type mentioned above and instead let matters rest based on the general Companies Act protection under Section 994. Otherwise, an over-elaborate structure may be created in which effective decision taking becomes impossible. If this view is adopted then the points noted below regarding service agreements, dividend policy and transfers of shares can be put in place to provide an element of minority protection.

Show More

Service Agreement

It was noted above that decisions on whether to terminate a contract of employment will generally be matters for the Board of Directors. However, a director/shareholder can secure certain protection if he is given fixed term service agreement.

The advantage of a fixed term service agreement is that if an employee is summarily dismissed in breach of his service agreement, he will have a claim for damages for wrongful dismissal and/or unfair dismissal against the Company.

Essentially, the damages he can claim will be based on the salary and benefits to which he is entitled multiplied by the number of years unexpired on the service agreement. It should be noted, however, that the employee is under a duty to mitigate his loss. Accordingly, to the extent that the employing Company can demonstrate that another job could have been obtained within a reasonable period at the same or high remuneration the claim for damages will be reduced.

Nonetheless, as the starting point for compensation discussions is the salary and benefits for the unexpired period of the service agreement the existence of a long-term service agreement can provide the executive with a good degree of comfort.

(It should be noted that an agreement for a fixed term more than five years will not be effective unless approved by shareholders in general meeting. This provision was introduced to prevent Directors introducing protection for themselves without shareholders’ sanction.)

Show More

Our Legal Expertise for Starting a New Business

Staring a new business can include a lot of legal terms and processes that may seem overwhelming at first.

At Landyon Bowdler, we are one of the most recognised Business Law Firms in Schopshire, we have vast knowlege and experience when it comes to advising clients who are looking to starting a new business. Our expert Corporate Solicitors will help you with all aspects of Corporate Law that arises when Starting a new Business.

Contact us today, we will see how we can help.

Dividend Policy

Unless the Articles of Association otherwise provide the Directors normally fix and pay interim dividends. So far as final dividends are concerned the amount in question must be recommended by the Directors and approved by the shareholders.

Accordingly, a minority shareholder might himself licked into a private Company with little or no return being made by way of a dividend.

Recent case law suggests that failure to pay a reasonable dividend can form the basis of a claim for unfair prejudice by an aggrieved minority shareholder (see paragraph 3 above).

However, there will always be difficult questions of how much cash is required for the working capital purposes of the Company. Accordingly, a dividend policy may provide added protection for the minority shareholder. This might be fixed as a percentage of the after-tax profits.

A device sometimes incorporated in Articles (particularly for the benefit of institutional shareholders) is a stipulation that, if profits are available for distribution, dividends become payable whether declared by the Directors. This is linked to calls rights giving shares a fixed percentage profit. Provided distributable profits are available the minority shareholder is not then in a position where the Directors or the majority shareholders will not approve a reasonable dividend. If he is not paid in accordance with the Articles, he can sue for the dividend payments in question which become a debt due to him from the Company.

Show More

Transfers of Shares

The Articles of the Company should always firstly be considered particularly as to whether they contain or should contain pre-emption provisions which give existing shareholders the right of first refusal before shares can be transferred to a third party.

The transfer provisions in the Articles of Association may be reinforced for the benefit of minority shareholders by put options in favour of an outgoing shareholder. It may be that such a put option will only be acceptable on the death of a shareholder where an insurance policy will provide the case to make the purchase of shares from personal representatives.

In addition, a “buy-out” clause may be included in the Articles. This would be to the effect that the majority shareholders cannot transfer their shares to a third party unless the third party has made an offer to acquire their shares at the same (or perhaps a minimum) price.

Show More

Restrictive Covenants

The Shareholders Agreement may be a suitable document in which to include restrictions on outgoing shareholders as to non-competition. Relevant restrictions may fall into four areas: –

  • The use of confidential information
  • Non-competition for a specified period in relation to a particular business
  • Non solicitation of customers or suppliers
  • Non-solicitation of employees

Restrictions of this type are prima facie unenforceable unless the party seeking to uphold them can show that they are reasonable as between the parties involved. The Court will look to the duration of the restriction, its scope and geographical limit in determining whether the restrictions are reasonable.

If written service agreements are to be entered into restrictions can frequently be included in the service agreement and dispensed with the Shareholders Agreement.

Show More

Lists of Ownership Matters and Managment Issues

Below is a list of possible Ownership and Managments issues that may arise when starting a new business.

Ownership Matters

List of possible “ownership matters” requiring prior written consent of a specified percentage of shareholders

(1) modification to the rights attached to any of the shares of the Company or of any subsidiary or the consolidation, subdivision or conversion of any of the shares of the Company or any subsidiary;
(2) the creation, allotment or issue of any class of shares or of any instrument convertible into shares by the Company or any subsidiary.
(3) any change or amendment to the Memorandum and Articles of Association of the Company or any subsidiary.
(4) any material alteration (including cessation) to the nature of the business or presently proposed nature of the business of the Company and its subsidiaries.
(5) the disposal of any interest in the capital or instruments convertible into capital of any subsidiary;
(6) the acquisition or formation of any subsidiary by the Company or any subsidiary.
(7) the purchase by the Company of any subsidiary of any of their own shares.
(8) The grant of any option by the Company or any subsidiary over the whole or any part of its capital.
(9) The passing of any resolution to put the Company or any subsidiary into liquidation.

Management Issues

List of possible “management issues” requiring specified approval

[(1) The adoption of or any material amendment to an annual business plan of the Company or any subsidiary shall include (inter alia) annual budgets and a statement of business objectives (“the Annual Plan”)]
[(2) Except and to the extent that the following are specifically authorised in the Annual Plan:-]
(a) capital expenditure on any item in excess of £###
(b) any revenue commitment in excess of £### per annum
(c) any contract representing more than [15] per cent of the turnover as [projected in the relevant annual budget of the Annual Plan;]
(d) the acquisition or disposal of any freehold or leasehold property or parts thereof or the granting or surrendering of a lease in respect thereof by the Company or any subsidiary;
(e) the acquisition or disposal of assets by the Company or any subsidiary (other than in the ordinary course of business) where the item to be disposed of is a capital item the net book value of which exceeds [1-] per cent of the net assets of the acquirer or disposer;
(f) any borrowing by the Company or any subsidiary (including debt factoring) (other than normal trade credit) any alteration in the terms of such borrowing and the creation of any charges on any Company’s or any subsidiaries’’ assets;
(g) any loan or advance by the Company or any subsidiary (other than an advance against expenses) exceeding £[ ] in aggregate to any one person or company (other than in the ordinary course of business) or the granting of any guarantee or indemnity of the obligation of any person, firm or company by the Company or any subsidiary (other than that of a subsidiary where such obligation is in the ordinary course of that subsidiary’s business);
(h) the disposal by the Company or any subsidiary of any patent, trademark, copy right, registered design or other know-how or intellectual property whether absolutely or by way of licence or otherwise; and
(i) any review of the Company or any subsidiary’s insurance cover.
(3) The remuneration drawings and benefits in kind of all Directors, consultants and key employees of the Company and any subsidiary and their service contracts (if any) or contracts for services (if any) (as appropriate) or any amendment to them.
(4) Any transaction, arrangement or agreement with or for the benefit of any Director of the Company or any subsidiary or any person “connected” with any such Director.
(5) The formation or acquisition by the Company or any subsidiary of any associated company or any other investment in another company or investment in a partnership, consortium or joint venture and any disposal of all or any part of such investment.
(6) Any political or charitable contribution by the Company or any subsidiary.
(7) The appointment or the termination of the appointment of any Director to the Board of Directors of the Company and the appointment of a committee of the Board or of the Board of Directors of any subsidiary.
(8) The approval of the annual consolidated accounts of the Company or any subsidiary.
(9) The appointment of the auditors to the Company and any subsidiary.
(10) The payment of any dividend.
(11) Any change to the accounting reference date of the Company.
(12) Any change to the accounting policies of the company.
(13) Any other matter out of the ordinary course of business of the Company and its subsidiary.
[(14) Specify any others]

Testimonials

What our clients say.

From the first contact, the team at Lanyon Bowdler gave a fast & efficient service. They were very friendly & gave me the confidence that I had found the right solicitors. The advice given & the fast responses were beyond my expectations. The matter was resolved in no time at all.

Martyn
via ReviewSolicitors

Having recently used Lanyon Bowdler for the sale of a business, we had no hestitation in contacting Edward Burrell again to represent us in the purchase of another company. His advice and judgement was always spot on and his personal dedication towards achieving our objectives and getting the best possible outcome for his clients was impressive.

Tim
via ReviewSolicitors

Got the advice I needed to help me with my business, always available when needed.

Duncan
via ReviewSolicitors

Our company needed some advice quite urgently and Lanyon Bowdler dealt with everything quickly and efficiently.

Debbie
via ReviewSolicitors

Since dealing with Lanyon Bowdler they have been diligent, efficient and at all times very helpful along with being structured in dealing with matters, fees and clarity on all levels. Thank you.

Michael
via ReviewSolicitors

I was clearly informed of progress step by step. The service you provided was very good.

Peter Weston
Shrewsbury

All work carried out effectively and efficiently.

Hubert Jones
via ReviewSolicitors

Smooth and efficient service from very professional firm.

Tim
via ReviewSolicitors

An excellent service with solicitors that you can talk to and who give you a clear understanding of all necessary legal implications and interpretations.

Eric
via ReviewSolicitors

From start to finish we had excellent service. Friendly, approachable and professional.

Carl Gittins
via ReviewSolicitors

Very clear, concise advice and guidance, easy to understand.

Ian Jamieson
Telford

Good service provided throughout with clear communication throughout with all options explored.

Lee

I can thoroughly recommend the highly professional and supportive service received over the last few months.

Heather
via ReviewSolicitors

Responsive, supportive, approachable, clear and empathetic.

Lisa Thacker

Professional and prompt communication. Supportive and client focused.

Lisa Thacker
Jennifer M Whittall Ltd

Whenever I have had need to contact Lanyon Bowdler I have always received a fast, concise and friendly response.

Lee Mortimer
UK Case Management

Definitely would use Lanyon Bowdler again if I need the use of a solicitor.

Mark Bowkett
via ReviewSolicitors

Smooth and efficient service from very professional firm.

Tim
via ReviewSolicitors

We were particularly impressed with the quality of work, the speed and excellent communication.

Allenby Douglas Ltd
Oswestry

Greatly exceeded my expectations!

Worxinfo Limited
Coventry

Very friendly and approachable. Very good advice

Ivor Brown
via ReviewSolicitors

Great Service; Lanyon Bowdler were excellent from the outset. Straightforward and easy process. I just sat back and waited.

Paul Rowe
via ReviewSolicitors

Everything has been professional, efficient and courteous throughout and we are very pleased, both with the service and with the eventual outcome of our case. Everything was first class and exceeded our expectations. Thank you again for providing such splendid service. It is really appreciated.

Mr N J & Dr S J Browne
Llanfyllin

Contact Lanyon Bowdler Solicitors

Give us a call or complete our online enquiry form, to see how we can help. We have offices in Telford, Shrewsbury, Oswestry, Ludlow, Bromyard, Hereford, and Conwy, so can act for clients all over Shropshire, Herefordshire, Mid and North Wales and across the Midlands.

Our people

Meet the team.

Gráinne Walters
Gráinne Walters
Partner
Corporate Law | Business Contracts | Business Sales & Purchases
Edward Burrell
Edward Burrell
Partner
Corporate Law | Business Contracts | Business Sales & Purchases | Leisure & Tourism | Education
David Ashcroft
David Ashcroft
Consultant
Corporate Law | Business Contracts | Business Sales & Purchases | Leisure & Tourism
Cecilia Wong
Cecilia Wong
Solicitor
Corporate Law | Business Contracts | Business Sales & Purchases
Abi Croft
Abi Croft
Solicitor
Corporate Law | Business Contracts | Business Sales & Purchases
Jennifer Edwards
Jennifer Edwards
Associate Solicitor
Corporate Law | Business Contracts | Business Sales & Purchases
Jemma Groves
Jemma Groves
Solicitor
Corporate Law | Business Contracts | Business Sales & Purchases | Education
Zoe Roberts
Zoe Roberts
Associate Solicitor
Business Contracts | Business Sales & Purchases | Corporate Law
Sam Russell
Sam Russell
Trainee Solicitor
Corporate Law | Business Contracts | Business Sales & Purchases
Knowledge

Latest knowledge.

Case Study
Paddle boarding in North Wales

Boltholes and Hideaways

We would heartily recommend Lanyon Bowdler to any business as the team structure enables the delivery of a comprehensive...
Juana Eastwood • 20 Mar 2024
Case Study
Oldfields Cider barrels

Oldfields Cider

We found the team to be exceptionally knowledgeable and efficient in resolving any problems quickly....
Edward Burrell • 19 Jan 2024
Case Study
Holmer Park, Herefordshire

Marches Leisure (The Shrewsbury Club) and Holmer Park Spa and Health Club (Herefordshire)

Corporate and commercial legal advice regarding business acquisitions....
Edward Burrell • 15 Dec 2023
Podcast icon Podcast

Starting a Business with Entrepreneur Ellie Beavan (Winsbury Dairy)

About setting up a business in the food industry, selling farm fresh pasteurised milk to shops, pubs and restaurants, an...
Published • 18 Sep 2023
Blog

Loan Agreements – Do I need Financial Condu...

It is very common for informal loans to be made between family members and friends but whilst the arrangement might...
Abi Croft • 01 Sep 2023
Blog

Top Tips For New Businesses

You have had a brilliant idea, the business plan is agreed and now you’re ready to start the business. Here are a f...
Zoe Roberts • 04 Jul 2023
Podcast icon Podcast

The Importance of Shareholders Agreements – Grainne Walters

We explain the differences between directors and shareholders, and how a shareholders agreement can detail how a shareho...
Published • 26 Jun 2023
Blog

Why Do I Need Written Contract Terms With M...

There is a phrase known as ‘over-lawyering’ and many businesses may feel that they have trusted re...
Zoe Roberts • 23 Jun 2023
Blog

Q&A: Focus on Warranty and Indemnity In...

Warranty and Indemnity Insurance, commonly referred to as W&I insurance, is often used in private mergers and a...
Zoe Roberts • 09 Mar 2022
Blog

Mistaken Filings at Companies House

Forgetting to file a form on time, including the wrong number in your calculations or simply misspelling a company’...
Gráinne Walters • 10 Jan 2022
Blog

Parental Responsibility Update

The removal of parental responsibility is the subject of many client enquiries. There are a large number of cases w...
Abi Croft • 22 Jul 2021
Accreditations

Our awards and accolades.

Contact us

Get in touch.

"*" indicates required fields

TOS*
Hidden
This field is for validation purposes and should be left unchanged.