By Nick Wallis, Tax Director At Smith & Williamson
Business owners should set aside the time early on in their relationship to discuss and agree a shareholders’ agreement. It may help to avoid the disruption and additional costs likely to be involved in resolving any future issues.
Although a shareholders’ agreement is not a document in the public domain, it may have to be disclosed in share valuation negotiations for tax purposes, so is not completely secret.
A shareholders’ agreement only governs its signatories, while the articles of association automatically govern new shareholders. This means, for instance, that the rules of a share option scheme might need to say that employees acquiring shares through the scheme will have to sign up to the agreement.
There are no rules about where the terms of shareholders’ agreements should be kept. But if it helps to make the information public, it should be in the articles so that third parties are legally ‘on notice’ but not if the terms might give valuable insight to competitors.
Here are ten typical issues the shareholders will want to regulate that should be considered for inclusion in your shareholders’ agreement.
1. Rights to appoint and remove directors.
2. Terms to protect minority shareholders so that, for example, unanimous shareholder approval is required for certain company decisions.
3. Restrictions on freedom to dispose of shares and, if other shareholders have pre-emption rights, at what valuation such transactions should take place. A minority stake in a company is usually powerless, so the value of the minority shares will be correspondingly reduced. This can be over-ridden in favour of treating all shares as being worth the same, rather as if the company was publicly quoted.
However, note that restrictions which affect the value of the shares, wherever they are set out, carry tax implications if the shareholder is an officer or employee of the company. Employment taxes, which are the responsibility of the company, may be payable as a result.
4. Restrictions on changing the nature of the business.
5. Terms regulating the raising of capital to avoid diluting existing shareholdings.
6. Dividend policy. Note that a stated dividend policy may affect the value of the company’s shares for tax purposes.
7. Waiver of dividends. Certain shareholders may agree to waive dividends for an agreed period or permanently. Again this may have tax implications because it may entail a value shift from one shareholder to another.
8. Limitations on directors’ freedom of action, for example to invest in a new capital project or charge the company’s assets.
9. Business plan. Setting out the business plan in a shareholders’ agreement may help to ensure that all shareholders have the same vision. Again, there may be tax implications to this. A clear plan, for example, to seek a listing in the next year or so may make the shares ‘readily convertible assets’ immediately under the extended statutory definition of this phrase. This would mean that share transactions with employees could be subject to income tax under PAYE and National Insurance Contributions on any employee profit from the shares not made under an approved share scheme or otherwise exempt.
10. How shareholder disputes should be resolved.
Don’t wait until it all goes wrong. If you have any questions on shareholder issues, please contact Nick Wallis on 020 7131 4187 or email firstname.lastname@example.org.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson Limited, Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.
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