What is a Shareholders Agreement? 5 reasons you should have one as a shareholder
Updated: Feb 8, 2021
When entering into business with others as a limited company, it is advisable to have a Shareholder’s Agreement in place. Whilst the Agreement isn’t a legal requirement it provides the basis of the commercial terms of agreement between shareholders and clarity when in dispute. A Shareholders Agreement protects each shareholders’ investments in the company, ensuring that the running of the business is supported by all.
A Shareholder’s Agreement is put together on a bespoke basis taking into consideration, for example, type of industry, technical terms, etc. – As no two companies are the same, neither will two Shareholder’s Agreements be. In general, the aim of an Agreement is to:
Determine the rights and obligations of a shareholder;
Ensure fairness in the sale of any company shares;
Regulate how the company is going to be run, and by whom;
Define how, and by whom, important business decisions will be made
Provide protection for both the shareholder and the company.
Why Should You Have A Shareholder’s Agreement?
1. Your shareholders won’t always agree
Whether you’re going into business with a family member, your best friend or a business associate, there is always the possibility that there will be disagreements. Although it can be difficult to anticipate falling out with someone you trust, it’s even more difficult to try to come to a solution whereby all shareholders are happy once tensions have already risen.
We recommend anticipating the worst and formalising the agreement from day one. This way, if the worst does happen and disagreements occur, the pathway to a solution is clearly laid out in black and white, allowing a swift resolution.
2. You can be assured that your business will be optimally managed
A wide variety of provisions can be made to ensure all shareholders are in agreement over how the company is to be run and shares managed. Each of these provisions will aim to ensure equality and protection for each shareholder and the company itself. Some examples may include:
· Agreement from all/certain shareholders prior to large sums being paid out;
· Agreement from all/certain shareholders when employing new staff members/company directors;
· Restrictions on diluting existing shareholders’ interest in the company through the issue of new shares;
· The ability to force the sale of shares in certain situations (gross misconduct, for example). It is within everyone’s best interests to see the company managed as efficiently and effectively as possible, and the Shareholder’s Agreement can work to manage expectations and ensure each shareholder is on the same page when it comes to day to day running.
3. You’ll provide protection for your shareholders
A Shareholder’s Agreement ensures the relationships between the shareholders are regulated. This assists with the management of the company, ownership of shares, and the protection of shareholders, for example, minority shareholders, or those owning less than 50% of the shares, benefit from an Agreement which includes a requirement for all shareholders to approve certain decisions. Not only does this make sure that your minority shareholders aren’t disregarded when discussing how the business is run, but it also ensures that you each have a say in the issue of any new shares and changes in company directors.
Similarly, a Shareholder’s Agreement will benefit a majority shareholder. Provisions can be made to enable majority shareholders to force the sale of all company shares, should the offer received come at a fair time and price to all. This is known as a “drag along” provision and reassures the majority shareholders that they are in control of their investments.
“Tag along” provisions can also be included in the Shareholder’s Agreement. This ensures that a majority shareholder can only sell their shares if the same offer is made to all other shareholders first, regardless of their minority/majority status. As a minority shareholder, this would enable you to have the “first right of refusal” as such.
4. You can connect share ownership with employment
In many cases, shares are held by directors within a company. If a director has shares in your company and subsequently resigns from their role, without a Shareholder’s Agreement, they wouldn’t need to sell their shares. The Agreement can include clauses to ensure that the director must sell their shares if they are no longer employed by the business. By doing this, you avoid a situation whereby the director commences employment with a competitor, whilst still benefiting from the hard work of your shareholders through receiving dividends.
In the case of a shareholder leaving the company, a Shareholder’s Agreement can also restrict where the person goes to work next, or the focus of their future business ventures. General employment contract terms may state restrictions; however, the Shareholder’s Agreement will go further to protect the company.
5. You can resolve disputes quickly and efficiently
There may come a time when your shareholders disagree on a matter that requires an unanimous decision according to your Shareholder’s Agreement. In addition to the requirement, the Agreement can have provisions to ensure quick and efficient resolution of any disputes. In our experience, the benefit of confidential procedures such as mediation or arbitration in the event of a stalemate situation provides all shareholders the reassurance that their opinions and wishes will be heard and considered without lengthy court litigation. Often, inviting an independent Mediator can ensure the issue is swiftly resolved by the shareholders themselves. Additionally, an Arbitrator can assist in the event of a shareholder dispute by making the final decision in the best interests of the company as a whole.
What If We Don’t Have A Shareholder’s Agreement?
Where there is no Shareholder’s Agreement in place, it’s hopeful that no disagreements occur. We don’t believe, however, it’s advisable not to go into business with your fingers crossed, hoping that no disputes will happen – These disputes are unavoidable at times! We aim to reduce the impact of such disputes by preparing a Shareholder Agreement that covers all eventualities. Yes, you might not need it, but for the time, money and feelings the Agreement can save in the long run makes it a recommended piece of documentation for any business with shareholders to consider.
To discuss how Serenity Law LLP can draft a bespoke Shareholder's Agreement for your business, or to consult an experienced member of our team, contact us today.
Who are we? How can we help?
Serenity Law LLP was founded by Avinder Laroya and Stanley Beckett, with the aim to provide agile legal services to control costs for business clients across the globe to manage legal operations more effectively. When working with corporate clients on advisory services, the team at Serenity Law aim provide practical advice and guidance covering all eventualities in your industry sector. Offering additional services, such as mediation, arbitration and documentation auditing, allow Ms. Laroya, Mr Beckett and their team to provide an all-round commercial law service.
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