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Shareholders Agreements – What They Are And Why You Need One

If you are setting up a company with people you know, such as family members or friends, you may think that having a Shareholders’ Agreement in place is a little over the top, especially if you are a relatively small enterprise.  You may even think that by asking for a Shareholders’ Agreement, you are insulting the other owners of the company by indicating you don’t trust them.

However, when it comes to business relations, it is always safer to have something in writing, just in case things go pear-shaped.  Even the best of business colleagues can fall out, especially where money is involved, and the Articles of Association may not offer full protection.  Failing to put a written agreement in place can lead to costly and personally destructive legal battles.

If your company has several shareholders, it is imperative to have a Shareholders’ Agreement in place, especially if shareholders have different voting rights.

Why should you have a Shareholders’ Agreement?

A Shareholders’ Agreement can provide for many eventualities including the financing of the company, the management of the company, the dividend policy, the procedure to be followed on a transfer of shares, deadlock situations, and valuation of the shares.  It governs not only the relationship between shareholders, but it also administers the relationship between the shareholders and the company itself.

For shareholders, a Shareholders’ Agreement provides a ‘go to’ manual if they need to look up certain rights, for example, regarding selling their shares to a third party.  It can also be used to discover how to carry out shareholder functions, such as voting and the appointment of directors.

A Shareholders’ Agreement provides the company with a solid framework from which directors can see the processes and procedures they need to follow in specific situations, such as granting share options to employees.

How does a Shareholders’ Agreement benefit minority shareholders?

Minority shareholders can often be in a vulnerable position, especially in a large company.  Many decisions made regarding the company may only require the consent of those holding 51% of the company’s shares.  This may mean choices are made by a few individuals that are not in the interests of the minority shareholders.  A Shareholders’ Agreement can provide veto rights to minority shareholders on certain matters and put in place a policy that all shareholders must agree on major decisions affecting the company.

What is contained in a Shareholder’s Agreement?

A typical Shareholders’ Agreement will cover the following:

  • what business the company will conduct and the intended rate of growth
  • a dividend policy (i.e. how much will be paid to shareholders and how much will be re-invested in the business)
  • the directors’ terms of employment and remuneration package
  • how much the company can borrow, and levels of future funding required to meet long-term goals
  • how directors are removed and appointed
  • the allocation, buying and selling of shares
  • acquisition or disposal of property or major company assets
  • when action can be taken to wind up the organisation
  • a dispute resolution process
  • any restrictions on the founders of the company if they choose to leave
  • “tag along” provisions, which enable a minority shareholder to “tag on” to a majority shareholder in the event of a share sale, where the majority try to sell only their shares rather than looking for a buyer for all the shareholders
  • “drag along” provisions, which operate if an offer to purchase the company is made and most shareholders agree. The majority can force the reluctant minority to accept the offer, so they do not destroy the potential deal

Conclusion

A Shareholders’ Agreement provides assurance to all parties involved in a company.  It can also be used to show potential investors that your organisation is well managed, stable, and a proper process is in place to resolve any disputes.

Smaller companies also benefit from the fact that a Shareholders’ Agreement can provide for a ‘right of first refusal’ should a shareholder wish to sell their shares.  This allows SMEs to prevent third-party investors or strangers from owning part of the business.

Shareholder Agreements should be reviewed regularly to ensure they relate to the needs of the company as it grows, and new shareholders come on board.

Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring.  Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered and practical manner.  Our company law department can advise and draft a comprehensive Shareholders’ Agreement for you.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.