New business owners often ask us what they should think about in terms of company governance, share ownership and dividends. Our first reaction is always one of relief – as company lawyers, knowing that our clients are thinking about these sorts of things is half the battle. It’s much more worrying for us when people charge into setting up and managing their companies without giving the future a second thought. Yes cash is king and you need to get out there and sell but please spend a little time sorting out the platform you’re selling from.
Assuming you’ve decided, or been advised, to set up a company, next work out who will own it and how it will be run. In very simple terms, this will then dictate what the constitution of your company should say (other terms include by-laws or, in the UK, articles of association) and whether or not you should think about having a shareholders’ agreement. Actually, not that simple then. Ok, let’s just go back a step – here’s a non-exhaustive list of the questions you should think about answering and discussing with your advisers early doors:
- Who will own the shares and in what proportions?
- Will all shareholders be directors? Or, if not, can each shareholder nominate a director to sit on the board?
- How can directors be appointed or removed? Only by shareholders?
- Do you want to be employees as well?
- How are key decisions to be made – at board level or by a % of the shareholders?
- Will shareholders have equal dividends or do you want different classes of shares so dividend payments can differ?
- How can you transfer shares? And if a shareholder wants to transfer do the others get a first right of refusal?
- Can shareholders transfer shares to a family member or nominee? (for example, for tax reasons)
- What if a shareholder dies?
- What about a first right of refusal on new issues/allotments of shares?
- If you have an even number of shareholders and directors, what if there’s a deadlock?
- Bad and good leaver provisions – can you force a shareholder to transfer his/her shares if they misbehave?
- How will you value the shares? If you can’t agree, would you appoint an independent accountant for example?
- Tag and drag along – if a third party purchaser of the shares is found, can a % of the shareholders in number or value force the sale through?
Running a business is exciting but it’s also challenging. Don’t be afraid to ask for help. Not all lawyers are unhelpful and expensive…..