Shareholders agreement – minority shareholder perspective

Minority shareholder protection case study

Gannons advised on a shareholders agreement and articles of association.

Our client was planning to invest in a small construction company and become a minority shareholder, along with two other investors. The company had one shareholder at the time and there was no shareholders agreement in place.

Negotiating the right agreement to avoid disputes

A minority shareholder stands in a better position if issues are negotiated and agreed at the point when the shares are acquired, before disputes arise. Minority shareholder disputes may arise if the necessary protections are not put in place in the articles of association and shareholders’ agreement.

Client’s objectives

Our client was not interested in being involved in the management of the company and becoming a director. Nevertheless, we recommended negotiating the right to appoint a director or at least increase their control over the board’s decisions.

Drafting key minority shareholder protection clauses

To achieve this, we drafted provisions requiring the board to obtain the minority shareholder’s consent on certain matters.

Actions requiring our client’s consent

As a result of our provisions, the board had to :

• obtain our client’s consent to change the company’s articles of association in the future.
• obtain our client's  approval if they wanted to seek further funding rounds, resulting in the dilution of our client’s minority shareholding
• obtain our client's approval if the company sought to either increase or decrease the company’s issued share capital.
• obtain our client’s approval for certain financial actions, such as borrowing above a certain level; declaring dividends; entering into transactions above a certain level of value; and finally, adopting their annual business plan.

Right to receive company information

We included other key provisions to enhance the minority shareholders’ position. These included the right to inspect board minutes and resolutions and the right to receive quarterly financial reports. We also drafted Tag Along Provisions

Tag Along Provisions

These are useful to protect minority shareholders in case of change of control.

Under a “tag along” provision, a majority shareholder or shareholders acting together, cannot sell their shares to a third party. That is, unless the third-party buyer offers to buy the shares of the other shareholders at the same price.

Our client could safely and successfully invest in the business as a result of our advice and actions, knowing that we had secured their position. Contact our expert corporate team to discuss what we can do for you - 020 7438 1060