alex clifton

If you own shares in a private limited company, the chances are you’ve had that shareholding valued at some point. This may be for insurance purposes (such as, a life policy to support cross options) or as part of your wider financial planning.

However, even if the valuation is undertaken by an accountant or professional valuer, the valuation of a shareholder’s shares is often not assessed with reference to internal factors and the impact this can have on potential realisation. This can give the unwary a false sense of security and sometimes a nasty surprise.

Typically, the company’s business is valued and then the value of each shareholder’s shares is based on a proportion of that total value (with perhaps some account of significant minority or majority interests). There can however be other key factors which impact on the valuation and the realisation of that value.

Imagine your company in which you have a 75% shareholding is professionally valued at £1m. The likelihood is that the value of your shares is assumed to be £750k without further question. However, any future buyer will almost certainly want 100% of the shares. If the remaining 25% shareholder has little interest in selling (perhaps because they are motivated differently), they could therefore easily frustrate any sale. In this scenario, that £750k could suddenly seem an awfully long way off. Furthermore, if the 25% shareholder is critical to the ongoing operation of the business, they could seek to take advantage of this by seeking to buy the remaining 75% at a discount, possibly under the “unspoken” threat of them leaving and setting up in competition. Again, this could seriously diminish the £750k value.

Conversely, if you are the 25% shareholder then questions should be asked about whether you have protection against dilution, protection against being cut out of dividends, a say in significant decisions, board representation and protection if the main shareholder dies. If not, then the reality is that the 25% shareholding is not worth 25% of the overall company value.

In summary, having well thought-out rules which regulate the operation of a company and the relationship between the shareholders is critical to ensure that perceived value is more aligned with actual and realisable value. These rules are commonly included in a Shareholders Agreement which if properly considered and drafted, can go a long way to dealing with internal factors which can affect shareholding value.

As part of putting in place a Shareholders Agreement, it’s important to assess shareholdings, each shareholder’s current and expected role and the plans for the future, so that the appropriate rules can be discussed and incorporated into the Shareholders Agreement.

A Shareholders Agreement can be an unfamiliar document to business owners and so the table below is a quick reference guide to common provisions and rules typically included:

 What is it?Benefit and how can it protect value
Board RepresentationThe right to be appointed as a director.This can ensure that the shareholder is able to protect value by being part of the day-to-day decision making.  
ManagementObligations on those running the company to operate it in good faith and in a prudent manner.  Promotes the operation of the company in a commercially sensible manner thereby maintaining value.
Consent MattersA list of significant decisions which need an enhanced level of shareholder consent.This can preserve value by giving a right to veto decisions which have the potential to impact on the value of the shares and prevent majority shareholders abusing their position.  
Dividend PolicyAn agreement on how dividends are split.  This can provide value by preserving the right to receive the expected dividends. This is particularly important where dividends are paid disproportionately to shares held through an alphabet share structure.  
Drag RightsThe right for a certain number of shareholders to force the other shareholders to join into a third-party sale (usually at the same price per share).  This can stop minority shareholders frustrating a third-party sale and realisation of value.
Tag RightsThe right to require shareholders selling a majority interest to a third party to procure an equal offer for the other shareholders as a condition to such sale.  This avoids minority shareholders being left with shareholders they don’t know who could dramatically change the operation and dynamic of a company.
Pre-emptionRestrictions on share transfers unless they have first been offered to existing shareholders, usually with an agreed price regime.  This can protect the shares from going to unknown or undesirable shareholders who could disrupt the operation of the company and prejudice value.   A bespoke regime can also provide a clear plan for succession, enabling outgoing shareholders to realise value while allowing the remaining shareholder sufficient opportunity to find funding.  
Mandatory TransfersA list of events where a shareholder is required to sell their shares back to the company and/or other shareholders.  Allows shareholders to buy out “rogue” shareholders.
Cross OptionsOften supported by life insurance policies to enable surviving shareholders to purchase and fund (using the insurance proceeds) the shares of a deceased shareholder.    This can prevent the death of a shareholder putting a financial strain on the company and the remaining shareholders while ensuring that the shares do not pass to unknown persons under Will or intestacy.   Conversely, it should enshrine value for the deceased shareholder and their estate.  
Restrictive CovenantsProhibitions on shareholders soliciting/dealing with customers, poaching staff, competing etc.Intended to protect damage to goodwill which could arise from an outgoing shareholder who is tempted to take advantage of their knowledge and contacts built while working for the company.      
ConfidentialityRestrictions on disclosing and misusing confidential information.Protects confidential information and trade secrets which could be very valuable.  
DeadlockProvisions designed to break deadlock where company decisions cannot be made due to an equality of votes (both at board and shareholder level).  Disagreements between equal shareholders nearly always prejudice the company and its value. Deadlock provisions are intended to ensure shareholders remain focussed on the best interests of the company and not any personal agendas.  

To discuss Shareholder Agreements further, please contact Corporate Partner, Alex Clifton, on 0116 281 6232 or email

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