A shareholders agreement is a must-have for any company with more than one shareholder. But what is a shareholders agreement, and why is it important for your company to function smoothly? A shareholders agreement is a legal contract between the shareholders of a company outlining their rights, obligations, and responsibilities for the management of the company. It protects both majority and minority shareholders, so the company runs smoothly without conflict.
Having a shareholders agreement in place is key to avoiding internal disputes
and ensuring all parties are aligned with the company’s objectives. Most companies with more than one shareholder will benefit from having their own shareholders agreement. For further guidance, visit Darwin Gray.
What is a Shareholders Agreement UK?
A shareholders agreement is a private contract that governs the relationship between shareholders. It’s different from the company’s articles of association, which is a public document filed at Companies House. While the articles of association set out the basic framework of the company, a shareholders agreement provides more detailed provisions on voting rights, share transfers, management structure, and dispute resolution. The two documents work together, but in some cases, a shareholders agreement can override the articles of association, offering more protection and clarity for the shareholders.
The agreement can also set out the company’s business strategy, voting rights, and how certain decisions are made to ensure the business direction is aligned with all shareholders’ interests.
Do I need a Shareholders Agreement?
Having a shareholders agreement is not a legal requirement in the UK, but it’s highly recommended for any company with more than one shareholder. As a company grows, the need for a shareholders agreement becomes even more crucial to avoid disputes, define shareholder rights, and set clear expectations. For example, the agreement may include restrictive covenants to prevent shareholders competing with the company, or selling their shares to third parties without approval.
Shareholders agreements are particularly useful when new shareholders join the company. A new shareholders agreement ensures that any new shareholder understands their rights and responsibilities. This is especially important when existing shares are transferred, or new investment is brought into the company.
What’s in a Shareholders Agreement
A shareholders agreement will include many elements that are critical to the company’s smooth running. Here are the most common provisions:
- Voting Rights and Decision Making: The agreement will set out how voting rights are distributed among shareholders, especially for specific classes of shares. It may also outline how executive directors or the management team are appointed and the extent of their decision-making powers.
- Transfer of Shares: Shareholders agreements often include provisions on how shares can be sold or transferred. For example, when existing shares are sold, other shareholders may have the first right of refusal. This ensures the shares are not sold to third parties that could disrupt the business.
- Dispute Resolution: One of the main reasons for having a shareholders agreement is to create a process for resolving disputes. A good agreement will set out how shareholders can resolve disputes. without going through lengthy and costly legal proceedings. In most cases. this will be mediation or arbitration before any issue escalates to court.
- Dividend Distribution: The agreement will set out how dividends are distributed among shareholders, so it’s fair based on their shares and the company’s performance.
- Restrictive Covenants: These provisions are included to protect the company from competition or harm. For example, shareholders may be restricted from starting a similar business that competes with the company or from transferring shares without approval.
How a Shareholders Agreement Protects Shareholders
A shareholders agreement protects both majority and minority shareholders. Minority shareholders are most vulnerable to decisions made by majority shareholders, but with a shareholders agreement, they have more control over voting rights and decision-making, so they can’t be abused.
A majority shareholder can also benefit from a shareholders agreement as it clearly outlines their obligations and powers, so they don’t get caught up in disputes or conflicts with other shareholders. An agreement also ensures the business direction of the company is well-managed and avoids disputes about the management, sale, or investment strategy of the company.
Legal Advice for Drafting a Shareholders Agreement
While you can draft a shareholders agreement yourself, it’s highly recommended you seek legal advice when doing so. The agreement must comply with company law and contract law, and must be specific to your business. This way the agreement is legally binding and enforceable, if any shareholder decides to challenge it.
The cost of drafting an agreement including legal fees is a small price to pay for the long-term protection of the shareholders and the company. By obtaining legal advice, you can avoid potential legal proceedings and disputes that can arise from poorly drafted or incomplete agreements.
What if you don’t have a Shareholders Agreement?
Without a shareholders agreement, you may face big problems, if there are disputes among shareholders. Disputes about the business, management, or transfer of shares can lead to expensive legal battles and may even put the company at risk. In some cases, the company may not know what its business strategy is or what the role of its executive directors are.
Most contracts including a shareholders agreement protect all parties involved and ensure the smooth running of the company. A well-managed company has both a shareholders agreement and articles of association in place to cover everything about the company’s governance.
Summary
In summary, a shareholders agreement is a must-have document for any company with more than one shareholder. Whether you are starting a new business, bringing in a new shareholder, or transferring existing shares, having an agreement in place is crucial for the success of the company and protection of all shareholders.
By seeking legal advice and drafting a full agreement, you can avoid disputes, clarify the business strategy, and ensure the company’s direction is aligned with the shareholders interests. In the long run, the shareholder agreement will protect the company’s value and ensure its growth is well-managed and provide a solid foundation for future ventures.