I am often asked to sort out in deals that which the shareholders simply have not thought of in advance. So excited are they like little kids with shiny new toys that they think there will never be a fall out on the playground. One key issue is the on going financial obligations. Below is a typical section from a Shareholders Agreement. Read it, then I’ll explain what each part means.
1. Finance
1.1 No Shareholder shall be obliged to subscribe for any shares or to provide any further funding to the Company save for Shares agreed to be subscribed for or funding agreed pursuant to the terms of this Agreement.
1.2 Any finance required by the Company, in addition to that agreed pursuant to the terms of this Agreement, will be borrowed by way of bank facility from the Company’s bankers or from other normal market sources upon terms agreed in writing by all the Shareholders.
1.3 To the extent that such financing provided for in Sub-clause 5.2 is not possible or is not available on terms acceptable to all the Shareholders for whatever reason, any funds advanced to the Company by any Shareholder by way of a loan shall be in accordance with [the terms and conditions contained in] Schedule 3.
1.4 If any finance required by the Company is to be raised by the issue of loan notes or debentures, then the loan notes and/or debentures shall be offered to the Shareholders pro rata to their existing holdings from time to time.
1.5 Any guarantees or indemnities given by all or any of the Shareholders in respect of the obligations of the Company shall be divided between those Shareholders who have agreed to give the guarantee or indemnity in the proportions which their shareholdings for the time being bear to the total issued shares but so that their additional liability shall not in any event exceed the amount shown in Column (5) of Schedule 1.
1.6 Any cash and surplus funds from time to time held by the Company shall be placed on deposit at the best rates obtainable and with institutions approved by the Board.
This basically says that just because you all put some money in to start the company, does not mean you have a bottomless pit of money and you are not therefore obliged to keep ploughing money in. This is important because when more money is needed, shareholders get in a huff when some are surprised that they the others expect all to put more money in. Get your understanding right from day one.
It also then makes clear, that if more money is needed, than what was started with, then those not coughing up more money will not be diluted by issue of shares for money to those who do put more money in. This is important because you may well disagree about putting more money in, or that it is needed, and you certainly don’t want to be dluted by those willing to put more money in who will get shares for that money.
Even more importantly, the agreement makes clear the money will therefore be borrowed by the company, but you will as a shareholder have the right to subscribe if you so wish.
Lastly, comes the financial liabilities. Why should you, a 5% shareholder be held as liable for any warranty as a 50% shareholder? Again, something you may not foresee – but better to get sorted early.
