The Importance of Shareholders’ Agreements

Setting up your own business, or investing in one, can be complicated enough as it is. You may have to create business plans, pitch your ideas, or work out complex accounting issues. Throwing the possibility of utilizing a shareholder’s agreement can be overwhelming, but it can offer multiple benefits to the business owner.

What is a Shareholders’ Agreement?

You might be asking, what on earth is a shareholder’s agreement? Not to sound patronizing, but it is an agreement between the shareholders of the company – whether a few shareholders or all of them. The agreement is meant to protect the initial shareholders’ investment into the company, determine how the company should be run, and set fair boundaries on relationship between the shareholders. Essentially, a good agreement should set out the shareholders’ rights and duties, protect the shareholders and the company, and determine how major company decisions should be made.

Why are they important?

If you are a smaller investor, and a minority shareholder, the decisions for the company will be made by those who own the majority of shares. You will be cut off from making any major decisions for the company. Even if the articles of association of the company protect the minority shareholders, the law allows these articles to be changed by three-quarters of the shareholders, leaving you at risk. A shareholder agreement which includes all shareholders to approve of certain decisions (like changing the company name, or merging with another), will protect your rights and initial investment.

If you are a majority shareholder, you can also benefit from having a shareholders’ agreement in place. If you want to sell your shares, but a minority shareholder will not agree, then the agreement can contain a provision which will force the shareholders to sell, called a ‘drag along’ provision. It sounds harsh, but this clause will let you sell your shares and capitalize on your investment at the time that you feel is most lucrative. You can also place paragraphs in the agreement which prevents the use or transfer of confidential information and trade secrets of the company from being used by the minority shareholders.

Finally, for both minority and majority shareholders, the agreement can put down rules and procedures for the transfer of shares. The law allows the transfer of shares to anyone – even John Doe on the street. The agreement prevents transfers happening in obscurity, and instead will often implement limits on who the shares can be transferred to, when it can be done, and how many shares can be transferred.

What if I don’t want a shareholder’s agreement – what are the risks?

Not wanting one is understandable. Starting a business can be complicated, and many smaller businesses feel confident that the owners can work together with the partners of the business without any conflict. But a savvy businessperson should consider every possibility, even the chance that a partnership relationship will be strained. By anticipating certain circumstances and including provisions for them in the shareholder’s agreement, business owners will save time and money in the future against possible disputes. Additionally, the process of developing the agreement itself can allow the business owners to have meaningful discussions and ensure they are on the same page. Additionally, a shareholder’s agreement is more beneficial than the articles of association because, if properly drafted, the agreement is confidential, whereas the articles of association must be registered with the Companies House. If you do not wish the general public to have access as to the inner workings and expectations of your business, the shareholder’s agreement is the best vehicle to use.

When forming a company, it is important to seek professional legal counsel who can give you advice on what provisions your agreement should contain, and whether or not your articles of association sufficiently protect you. There are some resources you can access online, and many companies offer templates; however, if your business is complex, or has large assets, it is better to seek out a professional’s opinion who can do the heavy lifting of drafting and troubleshooting for you.

If you think you need a shareholder’s agreement and you’d like some advice, call Simon Robinson on 01883 708155

 

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