8 Reasons why Companies should have a Shareholders Agreement

About Jonathan Lea

Jonathan is a specialist corporate and commercial solicitor who has over 11 years of experience at both large international City firms and smaller practices. For the last two years he has worked on a self-employed basis with a network of other freelance lawyers focused on entrepreneur-led businesses. If you'd like a competitive quote for any legal work please send an email to the address on the home page. You can also follow him on Twitter @jonathanlea

Even though there is no legal requirement to have a formal shareholders agreement, every company with more than one shareholder is well advised to have one.  Shareholder agreements ensure that the running of the company and the responsibilities of the shareholders are properly thought through, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion.  As a result, it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably.

Putting such an agreement in place is often quite far from everyone’s thoughts when starting a new business, but it is better to get a shareholders agreement put in place at the outset as further down the line views will diverge, circumstances change and resentment can build between shareholders leading to fractious disagreement in respect of the company.

Here are the following key benefits I believe make having a shareholders’ agreement important:

1) The 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.

2) Ordinarily a company is subject to control in accordance with the comprehensive body of company law (contained in both statute and case law) 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.

3) Unless agreed to the contrary in a shareholders agreement, the management of the company is determined mostly by the board of directors, while certain key decisions (particularly anything relating to ownership) are required to made by the shareholders in general meetings (or by written resolution).  Therefore an agreement is important to fully determine the basis for important decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

4) As opposed to articles of association which is a public document made available at Companies House, the shareholders agreement will remain private and confidential and will not be open to view by others such as creditors or non-member employees.

5) Having a shareholders agreement is a cheap way to minimise any potential for business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.

6) The existence of a shareholders agreement can assist in raising finance from banks or creditors and also demonstrates the stability of the business to other potential partners.

7) It prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death of a shareholder.

8) A shareholders agreement protects the rights of minority shareholders and the investment value of their shareholding.  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.

Finally, this post takes you to a questionnaire and checklist of all the common provisions to bear in mind when producing a shareholders agreement.

Our experienced team can produce bespoke shareholders agreements at fixed fee prices. Please email us your brief, or any form of term sheet, and we’d be happy to provide you with a very competitive quote. Alternatively, give us a call and we’ll be happy to have a short initial conversation to discuss your requirements.

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