Shareholders’ Agreement – What Is It & Why Do I Need One?
The importance of peace between shareholders cannot be understated. A positive relationship plays a significant role in both the smooth running and success of a company, and this means that it is vital that individual roles and responsibilities are agreed upon from the outset of any shareholder relationship. Along with the company articles of association, a shareholders’ agreement can be used to establish these fine details and protect the interests of all involved parties.
What is a shareholders’ agreement?
A shareholders’ agreement regulates the relationship between the shareholders and protects their interests even if they are a minority or majority shareholder. It governs the management of the company and is also used as a strategic tool to prevent disputes and ensure smooth operations. A shareholders’ agreement can signify to the investor or bank that there is business stability and clear strategies for swiftly dealing with issues as they arise.
Why do I need a shareholders’ agreement?
You may wonder “Why do I need a shareholders’ agreement?” when there are articles of association (‘articles’) in place. The articles are a legal requirement, as such, the usual contractual rules do not apply; unless a bespoke set of articles are adopted they do not offer the full shareholder protections that most shareholders would expect or effectively deal with disputes.
A shareholders’ agreement is a private contract between shareholders that can provide more tailored protections and mechanisms for enforcement if required. Nevertheless, it is important to note that a shareholders’ agreement will usually be drafted alongside the articles to ensure they work together effectively without creating conflict.
Below are only some of the reasons why you may need to have a shareholders’ agreement in place:
- Dispute Resolution
At the beginning of any business relationship, the outlook is generally positive, especially when the shareholders are friends, family, business partners or even investors working towards the common goal of forming a successful business. During this time, a dispute is not something shareholders tend to consider, nonetheless, this is the best time to discuss putting an agreement in place as the shareholders will ‘more than likely’ be on the same page and have a mutual objective.
At GA Solicitors, we have dealt with many matters relating to shareholder disputes. Unfortunately, it is only at that time that the realisation and implications of not having a shareholders’ agreement in place appear, not only financially, but also for the effective management of the company and even its reputation. A well-drafted agreement will not only save thousands of pounds in legal costs but also ensure a smooth and quick resolution if a shareholder dispute occurs.
- Transfer of Shares
If standard articles of association have been adopted (which is generally the case in most small companies) if there is no agreement that outlines how shares can be transferred, then a shareholder can easily transfer their shares to any third-party individual or company; they could be a competitor or someone with differing objectives. Additionally, it would also be beneficial to think about succession planning and how shares will be designated to successors or heirs, these procedures can all be dealt with in a shareholders’ agreement.
- Minority and Majority Shareholder Protections
Another reason why it is worth having a shareholders’ agreement in place is that it can provide protections for the minority shareholder by setting out that certain decisions must be approved by all the shareholders. It may also contain a provision also known as a ‘tag along’, meaning in the event the majority decide to sell their shares to a third party, the minority can also tag along and obtain the same price as the majority, preventing the value of their share from being diluted.
Likewise, the shareholders’ agreement could also provide protections for the majority shareholders, enabling them to have an agreed remit of decision-making power and force the minority shareholders to join the sale of the company. This can prevent a deal from falling through if the minority shareholders refuse to sell.
- Management of the Company
The directors of the company usually have the power to make decisions on the day-to-day running of the company. The shareholders’ agreement may specify how important decisions are to be made by setting out voting thresholds required for certain decisions as well as deal with deadlock situations (50-50 vote), where a decision needs to be made. It could even set out how the members of the board are appointed.
- Dividend Policy
To prevent issues arising with regard to dividends (for example, who is entitled to dividends and the amount they are entitled to), a shareholders’ agreement can include a dividend policy within the agreement that sets out how dividends are paid, especially when there are different classes of shares that allow different dividends to be payable to each shareholder.
- Exit strategy
Considering the likelihood that a shareholder may exit at some point in the future, it is important to have a clear exit plan drafted into the shareholders’ agreement to prevent issues from arising. This consideration could include determining the price of the shares and how they will be valued and/or the right to force the shareholder to sell their shares to the company or existing shareholders when they leave.
Following on from the shareholders’ exit you may also want to consider inserting restrictions on the exiting shareholder; for example, preventing them from setting up a competing business or working for a competing business.
The above are only some of the points to consider when it comes to why you need a suitable agreement in place, as always it is important to obtain legal advice when preparing a shareholders’ agreement to avoid common pitfalls. Here at GA Solicitors, we understand that each company is unique and are happy to assist in putting together a bespoke agreement that will effectively meet the needs of the company as well as the shareholders.
If you already have a shareholders’ agreement in place, it is equally important to review it regularly to check it meets the objectives of the growing and changing business. Our corporate and commercial solicitors in Plymouth will also be happy to review this for you along with your articles to ensure they are appropriately drafted.
If you would like to discuss your current shareholders’ agreement or put in place a suitable one for your company, do not hesitate to get in touch with our corporate and commercial team by calling 01752 203520 or emailing enquiries@GAsolicitors.com.
On a final note, as with any situation, “prevention is better than a cure!”.
All content on this website (inclusive of guides, blogs and imagery) is strictly copyrighted by Gill Akaster LLP, trading as GA Solicitors. It is not to be used by any third party without prior contact and permission. Any requests for content should be sent to katy.mckenna@GAsolicitors.com.