Shareholders' Agreement Sets Out Procedures
Freddy was looking concerned. “Pebbles,” said Freddy, “you know how John and I started up the farm consulting business a few years back?”
“Yes,” said Pebbles, “as I understand it, that company has done fairly well over recent times.”
“Yes, that’s all well and good,” said Freddy. “The problem is that John is thinking about selling his shareholding in the company to someone else. He mentioned Tom from down the road as a possible purchaser.”
“What do you think of that?” asked Pebbles.
“I’m not sure,” said Freddy. “I don’t know Tom that well but perhaps it could work.”
“First things first,” said Pebbles, “you need to find out a bit more information about Tom. You and John will also need to check the company’s constitution to see what is required if someone wishes to sell their shares. You also mentioned that you put in place a shareholders’ agreement at the time that you set up the company. You’ll also need to check that. I’m pleased that you went to the trouble of putting that in place as a good shareholders’ agreement will set out the process to be followed if a shareholder wishes to sell their shares. A lot of shareholders’ agreements also provide for pre-emptive rights. If yours does, it may mean that John will first have to offer his shareholding to you for sale before he can sell to any other third party, in this case Tom.
“It may also set out the procedure for the valuation of the shares. That is important in helping avoid a dispute with John as to how much his shares are actually worth.
“Your shareholders’ agreement may also record what each party has put into the company either by way of capital or other contributions. If Tom does end up buying the shares, it is important that each party’s obligations are clear, and so Tom should either became a party to the existing shareholders’ agreement or you should enter into a new shareholders’ agreement with him.
“You will also need to give some thought as to whether Tom is to become a director of the company. He may want to become a director and the shareholders’ agreement could record that any party who holds shares in the company will have the right to be appointed as a director of the company.
“Obviously there are many things to consider with a change of shareholding and as you will have gathered, Dad, a shareholders’ agreement is an important document to have.”
“Thanks Pebbles,” said Freddy. “I better have a look at the documentation that I have in place.”
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