Shareholder agreement - sweatequity and rights

[potemkin]

Hello everyone,

Would be great if you could help me.

We have a limited UK company with 3 founders. Over the last year two other people helped us build the company and we now want to make them shareholders. For that we are currently working on a shareholder agreement.

We would like to come up with a construct where all shareholders have to sell their shares at market rate when they are leaving the company as an employee or director.

The two new people claim that such a clause would not be valid for them and regarded as un-lawful, as their equity would be regarded as sweat equity and no one can be forced by a shareholders agreement to sell sweat equity.

Would be great to hear your thoughts on the "this is un-lawful" and any tips on how we can make them shareholders in such a way that we can force them to sell once they leave.

The shareholder agreement is a standard template.

Thanks a lot,
Mike

 

[akirk]

not sure why they consider that this is illegal - but then I am no specialist...

but there are often clauses requiring sale if leaving...
you need to check with a lawyer - get it wrong and it could get messy

Alasdair

 

[kulture]

I would also consider carefully having shareholders who are already arguing.

 

[akirk]

why make them shareholders - I assume that any shareholding will be a minority stake giving them no voting rights esp.

just give them a thank you bonus equivalent to the dividend you would otherwise have paid them - nice and simple!

Alasdair

 

[Free Lance]

For the new shareholders it is very common for there to be 'Good Leaver/Bad Leaver' provisions in the articles or shareholders agreement.

The existing shareholders need to have such clauses in place to prevent the new shareholders coming in, staying a while then moving on to another company (potentially a competitor) and keeping their shares. Having a mechanism to buy them out is essential.

There is nothing unlawful about asking the new shareholders to sign up to such provisions. I don't know where they are getting that from: completely wrong on their part.

The existing shareholders might have rights to object to being forced to accept new articles of association with those clauses in for example - but not the new shareholders. If the Existing Shareholders agree to the clauses, no problem.

Consider not just fair value for the shares. Typically these clauses differentiate between employee shareholders who leave for 'good' or 'bad' reasons. Good reasons are things like ill health, retirement, by agreement. Bad reasons are things like: just leaving, working for a competitor, being failry dismissed for misconduct, etc. The clauses are drafted to list one set of circumstances as being good and everything else is bad. Or vice versa. Good leavers are forced to offer their shares at fair value. Bad leavers are forced to offer their shares for £1.

Consider also how to calculate fair value. If the shareholder holds 15% of a company worth £1,000,000 then his shareholding may be worth a lot less than £150,000 since the 15% gives him no control.

Difficult clause to get right. Get advice. PM me if you need details of someone who can help.

 

[lesliedocherty]

I agree that disagreements on it at this early stage are a warning of things to come, but now you have offered it, taking it away will cause more problems.

But the initial offering to be seemed fair, and if anything very generous, where a normal bonus would have normally sufficed.

just my view.

 

[potemkin]

Thank you for your replies. There is currently no arguing over this point, rather the opposite. The new shareholders have pointed this out to the existing ones and made us aware that this clause wouldn't hold - they are not saying that they don't want it. However, I would like to clarify this point as it could cause issues down the line.

So the big question that still remains is: is there a difference between 'founder' shares and "sweat equity" shares in terms of rights given by legislation?

All shares would be the same class, so I was under the assumption that the shareholders would all be treated equal.


Thank you for your help,
Mike

 

[akirk]

as a shareholder I own xx shares of class yy
if you happen to own the same number in the same class then they hold exactly identical rights / etc.

Alasdair

 

[Paul Kelly ICHYB]

Not an expert, but first, there is no relation between a director and shareholder - they can be mutually exclusive!

Shares are shares. Unless there are different kinds of shares, with different conditions, there does not appear to be anything wrong with what you offer.

The only think you would need to clarify is how 'market value' is calculated.

Be blunt with them - tell them to take it or leave it!

 

[LawHound]

Sweat equity sooner or later has to be converted into a cash matter, either by a payment of cash to compensate them or shares with a cash value. It appears these 2 are saying they want to be shareholders for life with no market value clause applicable to them. As has been explained, its one agreement for all concerned and some negotiating needs to be done to knock this one becoming a distraction main event.
If you want to chat it through we can help, just call us on our main line.