For Business

Shareholders' Agreements and Cross Option Agreements

Shareholders' Agreements and Cross Option Agreements

Once a company has been incorporated, shares have been allotted and trading has commenced, the business owner/managers often fall into the trap of leaving the task of preparing a shareholders’ agreement to ‘another day’ and instead relying on the company’s model articles of association for protection. Unfortunately, that day usually only arrives following an acrimonious shareholder dispute or a shareholder’s proposed exit, at which point it may be too late to mitigate unintended consequences.

A good shareholders’ agreement will be a bespoke document that has been tailored to meet the particular requirements of the shareholders. It will usually cover issues such as reserved matters requiring specified high majority or unanimous consent, rights to appoint a director, permitted transfers to agreed third parties, e.g. a family trust or group company, pre-emption on the issue of new shares or the transfer of existing shares, keyman insurance for the company’s benefit, good/bad leaver and deadlock provisions.

Prudent business owner/managers should consider entering into a cross option agreement with their fellow shareholders to protect against difficulties resulting from the untimely death of a shareholder. The agreement makes reference to the shareholders’ life policy, which is held on trust. In the event of the death of a shareholder, the agreement enables the deceased shareholder’s estate to sell his/her shares to the surviving shareholders using the proceeds of the life policy. The agreement should also include a periodic policy review mechanism to ensure that the cover reflects the company’s share valuation.

BakerLaw LLP has experience in drafting bespoke shareholders’ agreements and cross option agreements, and is also able to advise shareholders of their existing rights under a shareholders’ agreement.

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