Shareholders Agreement- or lack thereof!

[Opinion87]

Title says it all. I just wanted to find out where I stand currently (and take a bashing for my naivety) before speak to my solicitor as I'm assuming he'll charge for the advice.

Started a business a few years ago without having a Shareholders agreement in place. There are three of us involved;

Limited Company, 100 shares
Person A- Company Director, 62 Class A Shares (Works full time for the Company)
Person B- Business Partner, 19 Class B Shares (Works full time for the Company)
Person C- Business Partner, 19 Class C Shares (No longer works for the Company)

The three classes of share are so--as far as I know--we can take dividends independently of each other, ie. Person A and Person B can take dividends without Person C taking them, and vice versa, of if Person B didn't want to wait for dividends and instead take more salary, and the associated tax hit.

Person C dropped from full time to part time around 18 months ago, and around 12 months ago stopped working for the Company completely. This was amicable, no problems there, we're all still friends. Person C dropped out when the going got tough and since then the business has somewhat hit another level and [touch wood!] is currently doing well.

What I'd like to know is where Persons A and B stand if Person C decides to kick up a fuss and becomes 'hostile'?
As C only has 19% of the shareholding I'm assuming his shares aren't really of much value, as anyone buying them would have no idea what they would potentially be worth unless they saw the books (which Persons A and B wouldn't allow.)
And any company matters/decisions/issuing of dividends would be completely down to Person A, as they are sole Company Director and majority shareholder?

Whilst I accept it's not excuse I am young, and I have learnt my lesson- a couple hundred quid in the short term is a bargain compared to the risks over the long term. And help/advice would be very, very much appreciate, before I speak to my solicitor.

 

[PipeTen-Carl]

What are the voting rights on each class type?

 

[Opinion87]

I will have to look in to that, but my accountant is away until Monday 16th. I would assume equal rights. Would that mean Person A has 62% of the vote and Persons B and C have 19% each, or does it mean each have 33%? If it's the former then Person A can put through any vote on his own, and if the latter, Persons A and B can put through any vote together?

 

[Free Lance]

I assume that Person C is not a director (business partner has no particular meaning in this context) so their position is just as a minority shareholder. I also assume that your articles of association are very plain and do not deal with things such as shareholders who cease to be involved as employees. Do check though.

The good news is that they cannot do a lot proactively. There are some rights to call meetings, have an audit of the company done, a right to receive annual accounts, etc. Bothersome rights that they can invoke if needs be but hardly worth worrying about.

The bad news is that they can just sit back and hold onto their 19% shareholding. While they might not receive a dividend they will be entitled to 19% of the value of the company if it is sold or liquidated solvently. They have minority rights not to be unfairly diluted (this is a complex area and there are ways and means to create a legitimate dilution) and there are very strong rights protecting them in the event that A and B simply get together and create a new company without involving C. The lack of shareholders agreement means there is no mechanism to force C to sell their shares or to determine the price for those shares.

Best outcome - negotiate a price and buy out C's shares if possible.

 

[The Resolver]

If you PM me the name of the company I will check out the Companies House file to establish the voting rights and other issues. Some times other classes of share have no voting rights.

But as Free Lance says its best to negotiate a price for his shares.

 

[The Resolver]

I have advised Opinion87 on PM and he has said I may re-post here.

I have download the Articles. They show that all three classes of shares have full voting rights so such is spread out 62/19/19 on all issues. B & C therefore cannot outvote A but they can prevent a Special Resolution (eg to liquidate,change name, change Articles) which requires a 75% majority.

Now I know for you the problem is just C but, for the record and for information generally in future, its worth pointing out that if B and C were to be of one voice then there is one way for B and C to outvote A. This will only work on one occasion as it relies on A's ignorance of company law. B and C can demand a shareholders meeting. As there are two of them, and the quorum is 2, that meeting cannot prevented by A not turning up. Suppose B and C wanted to appoint B and C as new directors. Now unless A says 'I demand a Poll' either before the vote takes place or immediately after , voting takes place by default on a head count so B and C can outvote A and appoint themselves as directors. This only works once because once A becomes aware he will henceforth always demand a Poll.He could then call a meeting to remove B and C from the Board but he needs to give 28 days notice in which time he has legal duty to provide all financial information to B and C as directors. Further B and C could call Board meetings in the interim to pass Resolutions on their own votes e.g. to take control of the bank account. A cannot demand a poll at Board meeting so he can always be outvoted.

 

[The Resolver]

...the answer to the specific question nevertheless is that C can make no significant impact but he has minority rights (so you have to watch your backs eg if you cut him out of dividends not declaring any to Class C ) as well as the right to sue A in the name of the company if A breaches any of his duties as a director . You need to negotiate a purchase of his shares . A and B ( not sure who you are) will work to buildup the company from hereon so why let C benefit from future growth when you sell out?