A shareholders agreement is a contract between the shareholders of a company which determines how a company will be run. However, there is no legal requirement for the shareholders of a company to enter into a shareholders agreement. Without a shareholders agreement, a company will be run in accordance with its articles of association and general company law (under statute and case law). Why then should you bother with a shareholders agreement?
1. Bespoke clauses to fit your company’s needs
The majority of companies are set up using standard format articles of association which do not go into anywhere near the level of detail you can go into in a shareholders agreement. Bespoke clauses can be drafted to meet the specific needs of your company dealing with matters as varied as shareholder responsibilities, dividends policy, minority shareholder protection and share transfer procedure.
2. Shareholder Disputes
It is not uncommon for shareholders to disagree. Even in companies with a husband and wife as the only two shareholders, disputes may arise (in fact, perhaps it is even more common in this scenario!). A shareholders agreement can set out the method of resolving a dispute leading to a quicker and more effective resolution and often preventing the dispute in the first place.
3. Management of the Company
Generally, the board of directors are in charge of the day to day running of the company with statute requiring only certain decisions be made by the shareholders. Under a shareholders agreement the shareholders can regain further control over the company by requiring that the directors obtain shareholder consent for certain decisions. The restrictions on board decision making can be as strict or lenient as the shareholders require.
A shareholders agreement is a private and confidential document between the shareholders. There is no requirement for a shareholders agreement to be made available to the public (unlike articles of association which must be made available at Companies House).
5. Death or Incapacity of a Shareholder
In the unfortunate event of the death of a shareholder, without a shareholders agreement the deceased’s shares will likely pass through their estate to a spouse or family member. This incoming shareholder may not, for any number of reasons, be an ideal business partner for the surviving shareholders. Equally, the deceased shareholder may not have intended to burden their family member with membership to the company. A shareholders agreement can prevent this by providing an option for the surviving shareholders to purchase the shares from the deceased’s shares. A similar option can be implemented for when a shareholder loses capacity to act.
6. Minority Protection
As stated under paragraph 3 above (Management of the Company), a shareholders agreement can include provisions so that certain decisions can only be made with shareholder consent. This can be extended to protect minority shareholders by requiring that certain decisions can only be made with the unanimous consent of all the shareholders. Common examples of decisions requiring unanimous consent are changing the company name, amending the company’s articles of association, changing the registered office and issuing further shares.
7. Majority Protection
Circumstances may arise where a shareholder who owns the majority of the shares in a company wants to sell their interest to a third party buyer but as a minority shareholder does not want to sell their shares as well, the third party buyer withdraws from the transaction as he cannot acquire 100% of the company. This can be prevented by the addition of ‘drag along’ provisions in a shareholders agreement which provide that if the owner of a certain percentage of the shares in the company wishes to sell their shares to a third party then that majority owner may force the minority shareholders to also sell their shares to the third party.
8. Business Stability
A shareholders agreement can demonstrate the stability of the business which in turn can assist in raising finance from banks or creditors.
If you wish to discuss this further please contact Alex O’Leary on 020 8891 6141 or e-mail him at email@example.com