Five reasons why your company should have a Shareholders' Agreement

A shareholders’ agreement can be a valuable document, to regulate the relationship between the shareholders, management of the company, ownership of the shares and provide protection for the shareholders. It is a private agreement between the shareholders and can therefore cover all of these points and more.

Below we look at five example scenarios to illustrate why your company should have a shareholders’ agreement.

1. I’m a majority shareholder and worried that the minority shareholders may stop some business decisions or a sale of the company

As a majority shareholder, you may not want a minority shareholder to be able to veto your control of the company.

A shareholders’ agreement can set out certain matters that can go ahead with majority or founder consent. And, if you want to sell the company, can require the minority shareholders to also sell on the same terms so that a deal can be reached, and the buyer can acquire the whole company.

2. I’m a minority shareholder and worried that I have no control over my investment

The directors need to be able to get on and run the business for the benefit of the shareholders as a whole. But a shareholders’ agreement can set out certain reserved matters that cannot go ahead without the agreement of most (or all) of the shareholders, eg issuing new shares (which may dilute your shareholding), fundamentally changing the business, borrowing money, and many other matters.

3. What happens if a shareholder dies?

Without a shareholders’ agreement (and subject to the Articles of Association of the company), a deceased shareholder’s shares are likely to pass to their personal representatives and then to their beneficiaries. But this may not be what the other shareholders want, and equally those individuals may not want the responsibility of the shares.

A shareholders’ agreement can agree in advance compulsory transfer provisions to require shareholders to transfer or sell their shares to the remaining shareholders or back to the company on death (as well as in other circumstances), to keep the shares within the original shareholder group. Agreed valuation provisions can also be included to ensure that the beneficiaries receive fair value for those shares.

Shareholders should ensure that their Wills tie in with the provisions of the shareholders’ agreement and look at the two together. The shareholders may also consider insurance to ensure that they are in a position to purchase those shares if the time comes.

4. Could the other shareholders sell their shares to someone else without my agreement?

Without a shareholders’ agreement, a shareholder may be able to transfer their shares to another person with limited restriction.

A shareholders’ agreement can set out agreed processes for what should happen if a shareholder wants to transfer their shares, eg are certain transfers allowed (to family for example), should they be offered to the other shareholders first, do the remaining shareholders have to approve a new shareholder?

5. What happens if we do not agree on how to take the business forward?

Unfortunately, shareholders may disagree from time to time. This can affect how the business can grow and change and divert time and attention from running the business on a day-to-day basis.

A shareholders’ agreement can agree now how those matters should be dealt with and also put in place a dispute resolution mechanism to settle matters swiftly, if required, saving time and money.

Putting a shareholders’ agreement in place now, and keeping it up to date as circumstances change, can smooth the way for running the business and dealing with business decisions, for the benefit of all shareholders and the company.

If you have any questions or would like to chat through your legal requirements, please contact Kay Miles on 01293 558512 or [email protected].