When drawing up a shareholder agreement, certain clauses are critical to ensuring fair play and clarity among shareholders. Here, we take a look at three crucial components you should pay attention to in any shareholder agreement, especially under UK law: voting rights, good and bad leaver provisions, and drag and tag along rights. Understanding these elements can help protect your interests and maintain harmony within the business.
Often Shareholder Agreements are lengthy, and you should pay attention to and seek legal advice on the whole document. For this article, we’re taking a closer look the clauses that relate your voting rights, leaving provisions and exit rights.
1. Voting rights
Voting rights determine how much say a shareholder has in the company’s decisions. These rights are critical as they affect the control shareholders have over corporate affairs, from minor operational decisions to significant strategic moves like mergers or acquisitions. In the UK, voting rights are often proportional to the number of shares a person holds, but this can be modified in a shareholder agreement to suit specific needs or to protect minority shareholders. It’s crucial to clearly define how votes are allocated and which decisions require a simple majority, supermajority, or unanimous approval.
2. Good and bad leaver provisions
Good and bad leaver provisions specify what happens to a shareholder’s shares when they leave the company. The conditions under which someone leaves can significantly affect their financial outcome:
- A good leaver might be someone who exits due to retirement, ill-health, or redundancy, and they are usually allowed to retain their benefits or sell their shares under favorable terms.
- A bad leaver, in contrast, is someone who departs under less amicable circumstances, like dismissal for cause or resignation without notice. Bad leavers may be forced to sell their shares back to the company at a reduced rate.
These clauses ensure that the departure of shareholders does not negatively impact the company’s operations or its remaining shareholders.
3. Drag and tag along rights
Drag along and tag along rights protect minority shareholders in the event of a buyout.
- Drag along rights enable a majority shareholder to force minority shareholders to join in the sale of a company. This clause ensures that a majority shareholder can sell their stake without minority shareholders blocking the sale.
- Tag along rights, on the other hand, allow minority shareholders to join in a sale, meaning if a majority shareholder sells their shares, the minority can tag along and sell their shares at the same terms and conditions. This protects minority shareholders from being left in a potentially devalued company after the majority exits.
If you’re drafting a shareholder agreement for your business it’s important to consider these clauses carefully to ensure they align with your business’s goals and the shareholders’ interests.
Whilst it’s more common for shareholder agreement templates to be used for investment rounds, the impact of an agreement which is not bespoke to your business needs can be significant.
It’s always wise to consult with a legal expert who understands UK corporate law, like the team at Jamieson Law, who can provide you with tailored advice and ensure your shareholder agreement is both compliant and effective.
A well-structured shareholder agreement not only protects individual shareholder rights but also enhances the overall stability and governance of your company. If you’re setting up a new agreement or revising an existing one, don’t hesitate to reach out for professional guidance. Call us today on 03308 184 218 or fill in our form HERE and we’ll drop you a line to organise a free discovery call.
