5 May 2022 by amara akhtar

Do I need a shareholders’ agreement?

Purpose of a shareholders’ agreement

A shareholders’ agreement is an agreement between a company and some or all of its shareholders. The agreement governs the relationship between the parties, with respect to the ownership of the shares and the management of the company.

What does a shareholders’ agreement include?

Some of the things typically covered in a shareholders’ agreement are:

  • The nature and purpose of the company
  • How decisions will be made (i.e. whether directors will be able to make decisions or whether shareholders’ approval will be needed)
  • How and when shares can be sold or transferred
  • Dispute resolution amongst the shareholders
  • Non-compete clauses and other restrictions designed to protect the company’s business

More complex agreements deal with, for example, preferential rights for investors in the company or the rights of the shareholders where the company or its business are being sold.

Benefits of a shareholders’ agreement

You may have noticed that shareholders’ agreements are rarely spoken about or discussed in the media. This is evidence of one of the benefits – a shareholders’ agreement is private and confidential.

Whilst the company’s articles of association are available for public viewing through the Companies House website, a shareholders’ agreement is a private document not available to the public.

A shareholders’ agreement can set out clearly defined processes for how company matters should be handled, such as when and how a shareholder may sell their shares or how dividends may be paid out. This clarity is helpful to shareholders, as it reduces the risk of disputes arising.

Minority shareholders can be given additional protections beyond the rights they have under general company law.  This can encourage investment in the company and, in turn, the growth of the business.

If a shareholders’ agreement contains non-compete clauses, the shareholders may feel secure in knowing that other shareholders do not have interests in similar or competitive companies.

Downsides of a shareholders’ agreement

If any of the parties wants to change the terms of a shareholders’ agreement, it is usually necessary for all shareholders to agree to the changes.  This is not the case when changing the company’s articles of association, which usually requires the holders of 75% of the voting rights to approve the changes.

Shareholders should also be wary of making their agreement overly restrictive.  If shareholder approval is required for too many company matters, this could slow down the day-to-day running of the business and make it harder to get things done.

Overall, introducing, amending, or enforcing a shareholders’ agreement can be a complex area of law – so it is important to get expert advice.  If you want to discuss a shareholders’ agreement for your company, please contact Tim Lucas, Matthew Miller or Amara Akhtar.

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