Many people who set up a company do so with people they know – whether colleagues, family or friends. From the outset, these relationships are assumed to be solid and well-natured. Therefore, the idea of legally formalising the relationship can seem unnecessary.
However, having a robust Shareholders’ Agreement in place will help protect your existing relationship. No matter what your business is and how strong your ties with your fellow shareholders are, you may experience tough times and disagreements can occur. Without a Shareholders’ Agreement, you could risk damaging your relationship, and your business and you may end up fighting a costly and stressful legal battle.
Having a Shareholders’ Agreement can help ensure your business is well run, keep clear lines of communication between the shareholders and add value to your business if you are ever looking for investment or to sell. Hopefully, you may never need to rely on your Shareholders’ Agreement for this reason, but if a dispute occurs, a well-drafted agreement is worth the investment.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a private contract between some or all of the shareholders of the company. All companies have rules based on company law set out in their articles of association and these apply to all shareholders of the company and are publicly available at Companies House.
A Shareholders’ Agreement sits alongside your Articles of Association and can set out a framework between the shareholders who sign up to it for dealing with all matters relating to owning shares in the company, the rights of shareholders (whether they are minority or majority shareholders), how the company will be run and outlines the dispute resolution in a deadlock situation.
While these matters can be set out in the articles many companies prefer to have bespoke arrangements between the shareholders set out in a separate document which only they have sight of.
The Shareholders’ Agreement can also provide the framework for other contractual documentation that the shareholders may wish to put in place such as Service Agreements or arrangements in relation to intellectual property ownership and provide for any arrangements personal to particular shareholders.
What's included in a Shareholders’ Agreement?
For your Shareholders’ Agreement to cover all your company's requirements, it is best to work with an experienced company law solicitor. They will take the time to find out about your business and the company needs to draft an agreement that incorporates them.
Shareholders’ Agreements will commonly include:
- How company shareholder/director disputes should be handled
- Which specific company matters require wider shareholder consent
- Shareholder dividend policy – outlining payments to shareholders
- Restrictions on company founders
- When the company can be wound up
- Shareholders duties
- Shareholder entitlements
- When major assets and/or property can be disposed of or acquired
- The issuing of new shares to incoming shareholders
- Restrictions on removing and appointing directors
- Board and shareholders meeting requirements
- The directors’ terms of employment and remuneration package
- First refusal for shareholders to buy shares of shareholders leaving the company
- Shareholders leaving the company – including a non-compete clause
Shareholders’ Agreements can be drafted to cover any reasonable eventuality, and, as such, are highly customisable to the needs of any business.
Can a Shareholders’ Agreement help avoid a deadlock situation?
If the shares in your company are held in equal proportions, it is possible that a disagreement leads to a deadlock. This prevents the organisation from moving forward and can lead to litigation.
By including a deadlock resolution clause in your shareholders' agreement, damaging deadlocks can be avoided.
What if a shareholder dies or becomes incapacitated?
Complications can quickly arise in the event of a death of a shareholder or mental incapacity of a shareholder and having the procedures to apply in such situations clearly documented can avoid unnecessary stress and confusion. Without clear provisions an executor or attorney  may become involved in the company in a way that was never envisaged by the original shareholders.
A Shareholders’ Agreement can allow surviving shareholders the option of purchasing the deceased or incapacitated shareholder’s shares allowing the continued smooth operation of the company.
Do I need a Shareholders’ Agreement?
It is all too easy to see Shareholders’ Agreements as being unnecessary and to take the view that you and your fellow shareholders are all ‘grown adults’ and will resolve any disagreements amicably if they arise in the future.
This is a very common position to take if setting up a business with people you know. A good deal of company legal advice volume helps bring disagreements under control following disputes where no shareholder agreement was not in place. It is sensible therefore to think of a Shareholders’ Agreement as a form of insurance; you may never need it, but if you do, it may be invaluable.
Consider that Shareholders’ Agreements serve a vital function to not only resolve disputes arising between individual company shareholders, but also between shareholders, the company, and its directors.
They can provide minority shareholders with a greater say in business decisions. In normal circumstances, the rights of shareholders depend on the level of their stake. Shareholders’ Agreements can be used to democratise rights across all shareholders.
Top 5 tips for Shareholders' Agreements
A Shareholders’ Agreement can include any provisions that the parties agree but the following 5 areads should not be overlooked:
- Relationship between the shareholders and directors – if the shareholders want to have approval over certain matters in the day-to-day running of the company it should be set out in the Shareholders' Agreement. The shareholders can also have the right to appoint (and dismiss) individuals as directors.
- Key issues for the shareholders and voting rights in relation to these – for example, there may be certain things that are so important to the shareholders they don’t want them to happen without unanimous consent.
- Dividends – in what way are the profits of the company to be distributed? There may be shareholder debt which is a priority or the shareholders may want to specify an amount for reinvestment annually.
- Leaving the company – what if a shareholder wants to sell their shares or in what circumstances will they be required to sell their shares, at what price and who to? These provisions are often described as good leaver and bad leaver provisions and are best agreed upon before any need to transfer shares arises.
- Deadlock – while no one wants to imagine disagreements between the shareholders when they are starting a business it can happen. A clear procedure to deal with this can protect the company, allow the shareholders to keep working together and maintain personal relationships.
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While there may be a small time and financial cost of setting up a Shareholders’ Agreement, the peace of mind provided is essential. Once in place, it should be kept under regular review to ensure it remains fit for purpose as the enterprise evolves.
Having a Shareholders’ Agreement will send a clear message to investors, lenders, partners, and other businesses that your company is effectively managed and there is little chance of future discord risking the viability of the business, and hence theirs.
Your fellow shareholders, co-directors, and other vested parties have nothing to lose and everything to gain by entering into a Shareholders’ Agreement.