Dividend distribution policies

In order to distribute a share of the company’s profits or earnings to shareholders, a company may implement dividend distribution policies. Some shareholders may want to reinvest profits back into the company but other shareholders might want the cash. There may be a compromise position of a minimum percentage paid out per year. The policy can be varied but there will be a default position in the event of a disagreement.

The management and operation of the company

Shareholders agreements are also a common tool used to set out how the company will be operated and managed. Clauses related to the management and operation of the company are very important and often feature in the beginning of a shareholders agreement.

For example, day to day business may be actioned based on a simple majority, whereas selling the company might need to be unanimous. It may also be necessary to define who is doing what, as small companies are oftened managed by the shareholders. ie who is responsible for sales, for doing the accounts etc. A clear description of responsibilities and decision making is required to ensure clarity within the company structure.

Share sales and termination of agreement

There are a large amount of unforseen contingencies that can be catered for in this section. Your business partner's circumstances might change and they want/need to get out of the business, can they sell their shares to anyone, or do they have to be offered first to the existing shareholders? If so, do they have to be offered at a certain price?

If one shareholder isn't pulling their weight or is being difficult, the other shareholders may want to push them out. Are there terms that a shareholder can be forced to sell their shares? What happens if a share holder dies? Do the shares just go to their heirs or do the shares get offered to existing shareholders first?

Finally, what happens if the parties want to end the agreement but don't want to sell their shares? It is common to have a termination agreement which ensures one person will be able to buy the other's shares, and the mechanism for doing so.

Dispute Resolution

How are disagreements between shareholders resolved? Having a clause for mediation or independent arbitration can be far simpler and less expensive than resorting to the court system.

Restraint of trade

Your business idea may be a unique one. Do you want a clause to stop one of the shareholders leaving and starting a competing business? You may also want to stop conflicts of interest by limiting shareholders from being involved in other businesses.

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