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The importance of a shareholders agreement

What is a shareholders’ agreement

A shareholders’ agreement governs the relationship between shareholders. Its different to the Articles of Association and Company Law, which covers the relationship between the company and its shareholders. Without a shareholders agreement one shareholder can not usually bring an action against another shareholder.

When can a shareholders’ agreement be important?

There are two main reasons for having a shareholders agreement:

  • to stop shareholders from doing things, like setting up in competition
  • to give more power to minority shareholders when voting

How a shareholders’ agreement can stop your fellow shareholder setting up in competition

The last thing that you may want is for your fellow shareholders to set up in competition to you and your business. One way of preventing this is to insert a simple ‘non-compete’ clause in a shareholders agreement. Non compete clauses are notoriously difficult though and can be difficult to enforce, so they need to be written carefully. They shouldn’t be too wide.

How a shareholder’s agreement can give more power to minorities

Normally, decisions are made by shareholders when they vote at shareholders meetings. Company Law states that most decisions can be made with a majority (more than 50% vote) with only a few decisions needing a super majority (75% vote). This means that minority shareholders can have very little real power to make, or veto, decisions, such as the appointment or removal of directors. This may not suit all business situations, especially where you have two or more founders holding equal share capital or a group of owners with varying amounts of capital, some of whom are directors and some who are not, but who are all working together for the company’s success.

Other reasons for a shareholders agreement

There are plenty of other reasons why you might want a shareholders agreement. For example, perhaps you want shareholders to sell their shares when they retire, this might be particularly important in small owner managed companies. Likewise, you might want to control what happens in the unfortunate case of death. You can summarise the reasons for having a shareholders agreement as “The 3Ds” – Death, Disability or Disagreement.

importance of shareholders agreement

Key areas for a shareholder agreement

This is not a comprehensive list as each situation is different, but it may help you collect the thoughts of all shareholders before you draw up an agreement.

  • Company details including structure, directors and officers
  • Purpose and aims of the company
  • Equity split of shareholders
  • Parties to the agreement
  • Shareholders rights, obligations and commitments
  • Decision making processes on major issues, required voting majorities and day to day operating decisions
  • Restrictions on the sale of shares
  • Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death or disability
  • Death, disability and other retirement compensation payments
  • Management contracts, director approval and remuneration amounts
  • Insurance and other protective requirements
  • Professional advisers and change of professional advisers
  • Dispute resolution
  • Changes to and termination of the agreement
  • Buy out provisions for leaving shareholders
  • Valuation of shares on changes and valuations of the business

Our view is that a shareholders agreement is not always required, and its often better to keep things simple – They can be quite expensive and difficult to write. That said, in some cases, particularly when a minority shareholder wants additional protection, they can be very useful.

Support on planning agreement

Please talk to us if you need help in planning for an agreement, especially where there are several shareholders, a new company is being formed, a shareholder wants to sell their shares or pass them to their children, someone is nearing retirement, or the company has borrowed money from a shareholder. We can help with share and company valuations and putting the shareholders wishes into an agreement with a local solicitor.

What is a shareholders’ agreement A shareholders’ agreement governs the relationship between shareholders. Its different to the Articles of Association and Company Law, which covers the relationship between the company and its shareholders. Without a shareholders agreement one shareholder can not usually bring an action against another shareholder. When can a shareholders’ agreement be important? […]

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