There is little doubt that a carefully worded shareholders agreement or specifically drafted articles of association can form a strong backbone for the relationship between shareholders in a limited company. Even the discussion of the possible contents of such documents can help to avoid misunderstandings that might otherwise arise at a later stage. However, the mere existence of a shareholders agreement cannot address all potential issues unless it is given careful thought at the outset.
Potential benefits
Even if shareholders have decided that it would be sensible to have a shareholders agreement, they often expect that it will be possible to produce an “off-the-shelf” “one-size-fits-all” agreement but this can be a risky way to proceed. However, different companies have different needs.
For example, a 50/50 share split creates the risk of “deadlock” if the two parties fall out on strategy. This may be an effective safeguard for a joint venture between two commercial organisations. However, many individual 50/50 shareholders in smaller businesses may be unaware of the consequences of such a deadlock arising and may not have addressed ways in which it might be resolved.
Overlooking important issues
Where the shareholders themselves are corporate bodies, it is not surprising that additional considerations will apply. However, the recent English case of McKillen v Misland (Cyprus) Investments Limited (2012) illustrates how easy it is to overlook apparently obvious opportunities for protection in such a situation, and demonstrates what can happen as a result.
In this case Misland (Cyprus) Investments Limited (2012) (“Misland”) was a majority shareholder of a company called Coroin Limited. The claimant was another shareholder. The articles of association of Coroin Limited and a shareholders agreement contained pre-emption rights which entitled the minority shareholders to acquire the interests of Misland if Misland had decided to sell its shares in Coroin Limited. However, the event which triggered the litigation was the takeover of Misland by the Barclay Brothers which resulted in them also obtaining control of Coroin Limited.
The claimant argued that the change of control of Misland triggered the pre-emption provisions but the court found that the change of ownership did not breach the terms of the particular pre-emption rights in the way that they had been drafted. The court went on to say that if it had been the intention of the other shareholders that the change of control of Misland Limited would be an event which triggered the pre-emption provisions this should have been expressly stated. As drafted, the pre-emption provisions only applied to a transfer of the legal title to the shares. They would not have applied to a transfer of the beneficial interests in the shares nor did they apply to the circumstances prevailing here in which there was an effective change of control.
Summary
Whilst it is better to have a shareholders agreement than to run a serious business without one, it is essential that the process of drafting it is not undertaken lightly and that all parties give careful thought to the risks that they may face and the steps that they might wish to take to manage those risks within the terms of that agreement.
Other related Articles
- When is a shareholder not a shareholder? (September 2012)
- Director’s duty or shareholder’s obligation? (November 2012)
- Shareholder Disputes – First Steps (July 2013)
- Interpreting a valuation mechanism in the Articles (August 2013)