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Avoid costly disputes with a Shareholders’ Agreement

Earlier this year, British reggae band UB40, well known for hit singles such as ‘Red Red Wine’, hit the headlines due to an ongoing legal dispute. After nearly 29 years together frontman Ali Campbell and others left the band and began performing together under the name UB40 on the basis that the UB40 name had been transferred to them. The remaining original band members (including Ali Campbell’s brother, Robin) raised an action on the basis that they were the only ones who could use the name.

The case has so far cost the band members thousands of pounds in legal fees, highlighting the potential costs and consequences of falling out and the importance of having comprehensive agreements in place to deal with disputes should they arise.

In light of this, it is worth considering the advantages of putting in place a shareholders agreement when entering into business with others:

What is a shareholders agreement?

A shareholders agreement is a contract between a company’s shareholders which sets out the way in which the company will be run and the responsibilities of the shareholders.

Who is protected by a shareholders agreement?

Shareholder agreements protect all the parties to agreement. However, they are especially important for minority shareholders. In most cases the shareholders with the majority of the voting rights will make the bulk of the decisions – however, provisions can be added to detailing specific situations where a simple majority is not sufficient.

What provisions do shareholder agreements contain?

The exact provisions contained in different shareholder agreements can vary but some common provisions include:
• decision making and consent issues
• the appointment/termination of directors
• the issue and transfer of share capital
• mechanisms for dispute resolution
• dividend policy
• the offer of shares to other shareholders in certain circumstances (such as default, incapacity and death of a shareholder)
• procedures for asset ownership should a party leave the business
• restrictive covenants which prevent shareholders being involved in competing businesses or poaching staff/customers

If UB40 had put in place a shareholders’ agreement then this would have made the position much clearer as regards the rights of each shareholder and therefore potentially avoiding a long, bitter and costly dispute.

If you have any queries regarding shareholder agreements then please contact either Alan Stalker or Angus McGuire in our corporate team on 01383 721 621.

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