Company Shareholders and Your Responsibilities
It is very important to have an agreement between investors and the company especially where the investors are not directly involved in the management of the company like directors. In order to protect their investment and to contribute towards the success of the business, company shareholders and the directors need to consider the following: –
- Company activity and any limitations on the sorts of activities the company can undertake.
- A restrain of trade on management and investor, so that neither of the parties can carry on competing work at the same time as the business and for a period of time after shares are sold.
- Company Shareholders need to have first option to purchase the shares of any shareholder wishing to dispose their shares. If more than one shareholder wants to buy, the shares should be apportioned proportionally to current holding to maintain equity between the shareholders. The method of valuing those shares should be decided. A formula based on the audited accounts is commonly used to assess value of the shares. On the other hand, an arbitrator can be appointed to decide on what is a fair market value for the shares.
- There needs to be agreement on what happens if a shareholder becomes bankrupt, is convicted of a criminal ofence, becomes mentally ill or is appointed to the board of another business or acquires shares in another competing business.
- The composition of the board of directors, the chairman, the frequency of the board meetings should all be set out.
- The investor will need to be certain that the company cannot move assets out of the business. Unscrupulous management could put the assets in another company, liquidate the first company and thereby ensuring that any investment becomes worthless.
- The amount of time the management and investor devote to the business. Normally the management would be expected to devote all their working time in the business.
- What expenses, salaries, fees can be paid to the directors. What fees or expenses should be paid to an investor if the investor also devotes his time in dealing with the activities of the company.
- Agreement to ensure that the management cannot pay themselves enormous salaries while freezing the shareholders dividends.
- Restrictions on issue of new shares. Existing investors would not want the company to be able to issue shares to others and thereby diluting their holding. Existing shareholders should be given the first right to subscribe for any new issue and therefore they have an opportunity to maintain their percentage of holding.
- A company shareholder will need access to the financial information in order to monitor the investment. Agreement needs to be reached as to what information will be made available. Normally in large companies, shareholders are provided with regular reports about the progress of the company.
- Depending on the circumstances, it is a good idea to have two cheque signatories, expenditure limits dependent upon the position in the organisation.
In conclusion, each case would need to be considered on its own merit. Where a number of family members are involved in a business relationship with varying rights and responsibilities, it would be advisable to enter into a shareholders agreement.
This would help them focus on important business considerations and differentiate between personal and business relationships.