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Why You Have Everything to Gain From a Shareholder Agreement

April 7, 2020

In the business world, relying solely on the articles of association to avoid any potential disagreement is a somewhat precarious position. 

Yes, the company’s articles do set out the boundaries between directors and shareholders, but they do little to handle any fallout if these rules are broken, and a dispute occurs. 

For this reason, a ‘shareholder agreement’ can provide more complete protection for shareholders and directors, who might otherwise find themselves at a serious disadvantage if internal conflict breaks out.

 

Do we really need a shareholder agreement?

It is all too easy to see shareholder 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 in 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 shareholder agreement like a form of insurance; you may never need it, but if you do, it may be invaluable.

Consider that shareholder 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. Shareholder agreements can be used to democratise rights across all shareholders.

What is covered in a shareholder agreement?

To make a proper determination whether you need a shareholder agreement, first consider what the document covers and whether this is important to your fellow shareholders and directors.  A shareholder agreement provides clarity on:

  • 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

Shareholder agreements can be drafted to cover any reasonable eventuality, and, as such, are highly customisable to the needs of any business.

Final words

While there may be a small time and financial cost of setting up a shareholder 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 shareholder 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 shareholder agreement.  

For more details on drafting a tailored shareholder agreement, please click here.  

Or if you would like Lawbite to review an existing shareholder agreement for a fixed fee, please click here.

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.