5th Aug 2021

Why you should be asking "What if?" instead of "What now?"

What if…? This is a question that I both ask of clients, and am compelled to answer where dealing with corporate governance documentation such as shareholders’ agreements and articles of association. It may be the most important question to ask when dealing with documents of this nature.

It is certainly better than “What now…?”

For example… What if one of us decided to leave, or acted in a manner inconsistent with our mutual expectations?

Well, dear client, I can put various provisions in place to ensure that, if a person ceases to be involved in the business, or breaches their obligations, they would be compelled to resign as a Director and offer their shares to the remaining shareholders, and depending on the circumstances, they may be offered for nominal value.

Contrast this with; I do not have any documentation in place, what now my fellow director and shareholder is not doing what they are supposed to do, how can I compel them to leave and hand over their shares?

The short answer is; without the other person’s agreement, or a time machine, you cannot.

The default articles of association (the Model Articles) do not include any provision for the majority of the most common “What if…?” scenarios, including:

  • Pre-emption rights (essentially a right of first refusal) on shares voluntarily transferred;
  • Compulsory transfer provisions for a misbehaving shareholder, or a Director/shareholder who leaves, or is dismissed from the company;
  • Compulsory transfer provisions on death, bankruptcy or loss of capacity, meaning that if any of these occur, you may well entirely lose control of to whom those shares are transferred;
  • Tag and drag along provisions on a sale (albeit there are some horribly complicated default statutory provisions in this regard) meaning that, should you wish to sell, but a minority shareholder does not want to, this can kill the transaction;
  • Appointment and dismissal of Directors outside of the statutory provisions;
  • Different class rights attaching to shares, or even just having different classes of shares in order to pay different dividends; and
  • Many other vitally important aspects which, as they appear in the articles, will bind all shareholders.

That is not to mention the variety of provisions that would be included within a shareholders’ agreement, which is a private contract between the shareholders in a company, and often the company itself.

These include confidentiality and restrictive covenants, both of which seek to protect the company both during the time a person is a shareholder, and also for a given period of time following their departure.

It is also worth mentioning that the restrictive covenant time periods within a shareholders’ agreement are often able to be significantly longer than those which appear in an employment contract.

A shareholders’ agreement could also deal with intellectual property and other assets introduced to the company at the outset, as well as loan arrangements and many other commercial aspects of the relationship between the shareholders/Directors and the company.

We offer free, no obligation consultations to discuss your business structure, and ways in which we can future-proof your business.

Ask us “What if…?”, as it is much better than “What now…?”

If you are currently asking yourself either of these questions, please call Oliver King on 07842 310 918, or email oliverking@berwins.co.uk.

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