As shareholders’ agreements are not a legal requirement are they necessary and should I waste my money drawing one up?
As its name suggests, a shareholders’ agreement is an agreement between some or all of the shareholders of a limited company.
Although not a legal requirement, a shareholders’ agreement is a lot more important and useful than you may assume. Far from ‘just another formality’ a shareholders’ agreement can govern the relationship between the shareholders, their responsibilities, the running of the company and also provide for a definitive procedure in the case of a conflict.
Setting up a company can be costly, and it is for this reason that a shareholders’ agreement can appear to some superfluous at the outset – after all, you and the other shareholders are all friends right?
A conflict situation always seems unlikely at the start (especially if you are going into business with friends or family). However, this is one of the most important reasons to enter into a shareholders’ agreement right at the beginning of a business relationship. Once a divergence of views has occurred it may already be too late to agree the terms of a shareholders’ agreement. Furthermore, the process should actually flush out any fundamental differences of opinion early on.
A shareholders’ agreement can be a useful tool in protecting shareholders by requiring certain important decisions to have the consent of some or all shareholders. Of course, the Articles of Association do afford some protection to shareholders but you must be careful when seeking to rely on these as they can be amended by a simple 75% majority of the shareholders. Additionally, the company’s Articles of Association are a public document which anyone can view at Companies House. On the other hand, a shareholders’ agreement is a confidential document which allows the parties to the agreement privacy.
Common areas that should be included in a shareholders’ agreement:
- Issuing/transferring shares – This can be used to restrict who can/cannot acquire shares in the company and should also deal with the event of the death of a shareholder, often giving the other shareholders the right of first refusal
- Restrictions – These will govern a leaving shareholder’s ability to compete with the company and how they must conduct themselves post departure
- Dispute resolution procedures – Setting out the precise procedure in the event of a dispute. Detailing at what stage you involve a third party, such as a mediator etc.
- Minority shareholders protection – Defining the decisions that will require the consent of some or all shareholders
- Tag along or drag along provisions – Tag along provisions allow a minority shareholder to force a majority shareholder to include their minority shareholding in a sale. Drag along provisions allow a majority shareholder to force a minority shareholder to sell their shares
- Running the company – This could be as in depth as required in the circumstances, detailing things such as dividend payments, employing people, high value contracts and financing the company
These are just a few of the clauses that can be inserted into shareholders’ agreements. Importantly, they need to be tailored for each company. An important aspect to remember is that the cost to create a shareholders’ agreement is certainly going to be less than the cost of litigation in the case of a dispute.
If you need advice regarding a shareholders’ agreement then call GA’s company commercial team directly on 01752 203500 or use our online contact form.
Emma Webb, trainee solicitor