Shareholders decisions are decided on by a vote, and in most cases will need a majority of votes in order to be passed. However, some decisions require a higher majority to pass, and it's common for shareholders to come across issues and dilemmas which cause disagreements.
What is a shareholders agreement?
One way in which disagreements can be navigated is through a shareholders' agreement. These contain clauses detailing how the shareholders should act in certain circumstances. Carefully thought out shareholders' agreements can help companies run smoothly with fewer delays caused by shareholder disputes.
What is the model article of association?
Many small and medium sized enterprises, as well as start-up companies, are governed by the model articles of association. These state that board resolutions can only be passed either by a shareholder majority vote, or unanimous vote if agreed in writing. They also give the chairperson a casting vote where the directors are split 50/50.
Should you change the ownership structure?
Sometimes the existing voting arrangements lead to a deadlock, where it seems no practical resolution is possible with the existing structure. To try and rectify this the owners may need to think about changing the ownership structure, usually by agreeing an exit for one of the parties. If the deadlock results in a litigation case then the court will look to see if the ownership structure should change, so it makes sense to try and pre-empt this by directors and shareholders agreeing aa resolution through one of the following options;
- Buy their shares - Firstly, the company could buy shares of the shareholder who is ready to move on. The Companies Act 2006 permits buying back shares, but only if the company has sufficient distributable profits and full payment is made on completion. This means that any kind of payment plan to help cashflow, is out of the question. A buyback in tranches (several buybacks) however, does not fall foul of the legislation.
- Sell their shares - Secondly, the leaving shareholder has the option of selling their shares in the original company to another company, in exchange for deferred consideration. This new company will then become the holding company after completion of the purchase.
Both options come with tax issues to consider, so we recommend seeking advice from your accountant.
Find out more
Please get in touch with our commercial lawyers if you require advice generally or help in drafting commercial contracts or terms and conditions.
