Do you need a Shareholders Agreement?
While it is not actually a compulsory legal requirement, a properly considered and drafted shareholders’ agreement is highly recommended for all companies – especially if your company has 2 or more independent shareholders.
When it comes to split shareholding, getting the right agreement in place from the outset is always useful and in many cases an essential part of protecting your position.
For free initial advice about getting the right Shareholders Agreement, just call us now on FREEPHONE 0800 1404544 or Salisbury 01722 422300.
How we can help.
When it comes to setting up or restructuring your company, you’re going to need need specialist business lawyers you can rely on.
Our commercial team provide practical, value for money common sense advice for small and medium-sized businesses from our offices in Salisbury, Andover and Fordingbridge for both clients locally in Wiltshire, Hampshire and Dorset -and nationwide. We have particular experience of setting up companies for property investors – and in particular, getting the right shareholders agreements for their SPV company.
Click here to read more about how we help property investors
What is a Shareholder Agreement?
A Shareholder Agreement is a private contract in writing between the shareholders of a company and, unlike the Articles of Association, it does not have to be filed at Companies House and can then be read by anyone.
The agreement sets out the rights and obligations of the Shareholders, regulates the sale of shares in the company, details how the company is going to be run and how important decisions are to be made.
What provisions should my Shareholder Agreements contain?
Among the issues you need to consider when drafting the agreement of the following;
- How a new shareholder can join the company.
- A consistent procedure for all shareholders to protect their rights and identify their responsibilities in the company.
- How shares are bought and sold and when and by whom, including, if you wish, those occasions when shares must be sold by an unwilling shareholder.
- What happens when new shares can be issued by the company.
- A ban or restriction on the transfer of shares. This often includes a right of pre-emption (first option for existing shareholders to buy) before a shareholder can transfer to a third party
- Any company dividend policy (i.e. the proportion of profits to be paid out as dividend and the proportion to be retained to fund the business).
- Borrowing above a certain level or the granting of security over the company’s assets
- How the board of directors and senior management team will be comprised, how they will be paid and other terms of employment
- How the value of the shares is to be determined – for example whether minority shareholdings should be valued lower
- Levels of borrowing and future funding
- Purchasing company shares back from a Shareholder
- Whether minority Shareholders should be given the opportunity to veto decisions on certain key subjects?
- The activities the company will carry on
- How the shareholding is to be valued when you sell and lay out a dispute resolution process if the value cannot be agreed.
- Those decisions made in the running of the company that can only be taken if all the Shareholders agree.
- How the powers of any directors of the company who are not an owner are to be exercised for the benefit of the shareholders and the company.
- The acquisition or disposal of any premises
- The award to Directors or employees of more than a certain value of remuneration, and/or the dismissal of a director or employee earning more than that remuneration
- The buying or selling of a business and other assets over a certain value
- The buying or selling of a significant stake in another company
- Taking on capital or hire purchase commitments above a certain level
- The procedure for the winding up of the company
- The purpose or change to insurance other than for full replacement value
- The appointment or removal of a Director
- What happens if a shareholder falls ill, becomes bankrupt or for some other reason cannot participate in an owner-managed business anymore.
- How decisions about the company can be made smoothly without undue administration but still keeping the shareholders informed.
- How a deadlock on a decision to run the company can be resolved. This is most important, as without such a procedure a deadlock can seriously damage the business and sometimes cause its demise. A simple procedure in the shareholder agreement can help to allow the owners to find a way out.
- Changes to the company’s Articles of Association
- Any agreed exit route and timescales
Do I need a Shareholder Agreement now or later?
If you start a business with others and purchase an ‘off the shelf’ company you may think a Shareholder agreement is an unnecessary luxury that can wait until profits appear. A decision delayed can often be neglected for ever and the benefits of such an agreement are then unavailable at the very moment it is needed: when owners fall out or want to sell.
You can create a Shareholder Agreement at anytime during the life of the company. You can review it as your needs and those of the business change and can amend it by agreement. You can even make it exist for a fixed period of time, such as three years, and then it has to be renegotiated.
Are my company’s Articles of Association enough to protect my interests?
The first thing you need to know is that having Articles of Association is a legal requirement for any limited company. What’s more your Articles are a public document – in contrast to shareholders’ agreements which are private contracts.
However, Articles don’t provide complete protection for you and your other shareholders if things go wrong.
Avoiding expensive shareholder disputes.
If you run your company without a bespoke shareholders’ agreement,and you have more than 2 shareholders, then you are putting both shareholders and the company itself at serious risk of potential future conflict. This is especially the case where the company’s voting are split equally (50% each) by just two people or companies. That creates a real risk of a deadlock with no easy way to resolve any disagreement without litigation.
Many costly disputes in companies have been resolved and problems avoided as a direct result of entering into a Shareholder Agreement. Our commercial solicitors can explain all the options open to you, advise on the best one for your business and help set it up.
Click here to read more about shareholder disputes, director disputes and company disputes
And if you’re thinking of entering into a joint venture that needs a shareholders agreement, don’t forget the importance of due diligence on your new business partner. Want to know the kind of things you need to look at?
Click here to download our FREE joint venture due diligence checklist
