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Why have a Shareholders' agreement?

Often companies are set up with the excitement of a new venture or business opportunity and a number of people come together to form the company and drive that business forward. One of the key documents that is often overlooked in the start-up days of a company is the Shareholders' Agreement. This is a fundamental document that sets out the rights and obligations between the Shareholders and often the Company in the general running and decision making of the company. A Shareholders' Agreement is not a mandatory company document however it is a document that needs to be considered carefully and put in place as soon as the business has started to move forward.

So why have a Shareholders' Agreement? There are often companies that are set up amongst business colleagues, friends or family and this is an important document to regulate the relationship with each other particularly on key issues such as dividend policy, transfer of shares and what should happen in the event that the relationship falls down or one of the Shareholders is no longer able to act in that capacity. It sets out the procedures and rules to be applied in often stressful situations to help to resolve the issues. They should also be used where several commercial enterprises wish to combine forces as a joint venture or for investors to come aboard and to offer funding to help grow the business.

The relationship between the Shareholders in many SME businesses is based on trust and understanding that sometimes is more akin to a partnership. Limited companies are bound by the fairly rigid rules of the Companies Acts and those structures may not be entirely suitable for the arrangement between Shareholders. When that trust is broken the fall out can be long, acrimonious and expensive. A Shareholders' Agreement can be put in place to try and identify and minimise potential disagreements and offer a process for when such disagreements arise. 

A key benefit of a Shareholders' Agreement is that they remain a confidential document whereas most of the regulatory documents such as the Articles of Association are filed at Companies House on a public register. They are also flexible and as a company evolves, they can be easily amended to perhaps deal with a departing Shareholder or a new Shareholder or a change of direction of the business of the company. 

The types of areas that a Shareholders' Agreement will cover would include:

  1. Protection for a minority shareholder and veto rights on a major decision.
  2. Identifying the business of the company which is more important now that this is not a requirement under the Articles of Association. It is of importance to ensure that departing Shareholders do not compete with or undermine the company’s business when they leave.
  3. Shareholder consent for any decision to ensure that certain steps cannot be taken without unanimous Shareholders votes, such as removing a Director.
  4. The rules for allowing the transfer of shares in certain circumstances which may well override the provisions in the Articles of Association. One of the key elements of this is what is known as the good leaver and bad leaver provisions which may set out different valuations depending on the manner in which a Shareholder leaves.  This requires detailed review and understanding amongst the Shareholders and is often bespoke drafting to fit the Shareholders' requirements.
  5. A clear dividend policy to ensure that this is handled lawfully and in each Shareholder's interest as some Shareholders may be less concerned with the payment of dividends than others.
  6. Restrictions on the Shareholders competing with the company and also when they leave the business to ensure that the company is protected from seeing key employees, suppliers or customers leave as a result of the departed Shareholder setting up a competing business.
  7. The way in which the Agreement can be terminated in certain circumstances.

The key reason for having a Shareholders' Agreements is that it clearly sets out how the Shareholders need to treat each other with the investment of time, energy and money that they are making into the company. The absence of a Shareholders' Agreement means that disputes and disagreements between the Shareholders can take longer and be more difficult to resolve. This will always have a cost implication which would far exceed the cost of putting a Shareholders' Agreement in place.

For further advice in this area please do not hesitate to contact Will Cadbury at or call us on 01905 723561.

Added: 02 Feb 2024 10:31

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