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about this template
This shareholders’ agreement is intended for use by small to medium sized services companies.
The agreement contains:
- standard provisions dealing with the management of the company and the relationship between the shareholders (e.g. rights to appoint directors, matters requiring the approval of all appointed directors, the provision of financial information, and confidentiality provisions, etc.)
- provisions to address the special requirements of services companies with owners working in the business.
The agreement is drafted on the basis that shareholders have agreed that they must all work in the business and deliver an expected contribution to the company. Shareholders who cease to meet these requirements can be required to exit the company. Shareholders may also voluntarily exit the company on notice. In each of these cases, the company is required to buy back the shares of the exiting shareholder.
Compulsory buy-back of the shares of exiting shareholders provides certainty to both continuing and departing shareholders. However, it creates commercial risk because the company/remaining shareholders may not have the cash available to fund the purchase. To help manage this risk, the template gives the remaining shareholders the option of winding up the company if they do not wish to complete a buy-back.
Users of the agreement will need to specify the formula to be used to calculate the purchase price of a departing shareholder’s shares. This is a key detail to be agreed between shareholders when completing the agreement. Each shareholder needs to consider the purchase price formula from the perspective of both continuing and departing shareholders (because they could be in either category in the future). We recommend that you involve your accountant and/or an experienced company valuer in setting the purchase price formula, as they should be able to guide you on approaches taken by comparable companies in valuing the shares of departing shareholders.
The agreement allows the company to pay a lower price for the shares of a bad leaver, e.g. a shareholder who is required to leave the company for failing to make their expected contribution or for material breach of the agreement. We have suggested a 25% discount for bad leavers.
The agreement is not likely to be suitable for use with product or high growth companies as it is often appropriate for shareholders in those types of companies to retain their shareholding after ceasing to work in the business.
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