Simply put, a Shareholders Agreement is a document that every company with more than one shareholder should have. It contains the rules by which the shareholders agree to operate the company and in general terms provides the basis of a legal agreement between them. Shareholders Agreements ensure that the running of the company and the responsibilities of the shareholders are properly clarified so there is certainty as to what can or cannot be done and decisions are taken by consensus and discussion. As a result, having a Shareholder’s Agreement in place is more likely to reduce the potential for conflict between shareholders and this will help the company to be run smoothly and profitably.
So why have a Shareholder’s agreement?
A Shareholders Agreement works in conjunction with a company’s articles of association, but will give shareholders greater protection than can be provided by the articles alone, not least because companies are often set up quickly and cheaply just with standard articles that will not include much detail regarding protective provisions for shareholders or define the limits of their responsibilities..
Ordinarily a company is subject to control in accordance with the Companies Act that governs how a company should be run. However, a Shareholders’ Agreement can contain any arrangement agreed between the shareholders and can vary what would otherwise be the legal position without it.
A Shareholders Agreement is a cheap way to minimise any potential for business disputes between shareholders by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution. Common sense and tolerance may not be enough to end a dispute where a specific action is called for. A Shareholders Agreement will force an end to a dispute, by providing a structure within which the parties have to abide. In the event of a stalemate situation a Shareholders Agreement will provide a procedure to allow the parties to go their own ways.
A Shareholders Agreement can make provision for what happens in the event that a shareholder’s personal circumstances change to safeguard the remaining shareholder’s financial interest in the company in the event that a fellow shareholder dies or wishes to leave/retire. A common provision in a Shareholder’s Agreement is a right of pre-emption, or first refusal. This means that if a shareholder should die or wish to exit, their is offered to the remaining shareholder’s who have a specified time period in which to make an offer for the shares. It is only in the event that the remaining shareholders do not wish to exercise their right of first refusal that the departing shareholder’s shares may be offered and sold to a third party. Needless to say, this is an extremely important provision as it ensures that the remaining shareholders do not have an unwelcome new partner forced upon them!
Shareholders Agreements can control minority shareholder by placing restrictions on them if they leave the company and compelling them to transfer their shares in certain circumstances such as when the majority wish to sell the company to a third party. A Shareholders Agreement can also protect the rights of minority shareholders and the investment value of their share holding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place a Shareholders Agreement can only be amended with the agreement of all of the shareholders, whereas the company’s articles of association can be changed by a 75% majority meaning that a shareholders agreement provides better protection for minority shareholders.
If you require a Shareholders Agreement for your company, call Luke Rees a solicitor in our commercial team on 01623 451111 for a fixed fee quote.