A shareholders agreement governs the operation of a business and is a contractual arrangement among the company’s shareholders. However, shareholders of a company are not obligated by law to sign a shareholder’s agreement. A company will operate in accordance with its articles of association and general company law, as established by statute and case law, in the absence of a shareholders agreement. In this article, Do I Need A Shareholders’ Agreement, we take a look at the process involved and the options available to you.
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What are the reasons for signing a shareholders’ agreement?
If it isn’t a legal obligation to sign a shareholders’ agreement, why would you need to sign one? There are a number of reasons why it would be prudent to create a shareholders’ agreement and they can include:
What happens if there is a dispute?
Disagreement among shareholders is a frequent occurrence. Disputes may arise even in companies owned by a husband and wife or close friends as the sole shareholders; in fact, they may be more frequent in these particular situations. A shareholders’ agreement may stipulate the procedure for resolving a dispute, which frequently prevents the conflict from arising in the first place and can result in a more efficient and expeditious resolution.
How is the company run?
In general, the responsibility for overseeing the daily operations of the company lies with the board of directors; only specific decisions are mandated by statute to be decided by the shareholders. The shareholders may regain additional control over the company through the implementation of a shareholder’s agreement, which mandates that the directors obtain shareholder consent before making specific decisions. Board decision-making may be subject to varying degrees of stringency in accordance with shareholder preferences.
What happens if one of the shareholders dies?
Without a shareholder’s agreement, in the unfortunate event of a shareholder’s death, the shares of the deceased will likely pass through their estate to a spouse or family member. The surviving shareholders might not view this incoming shareholder as an optimal business partner for a variety of reasons. Likewise, it is possible that the late shareholder had no intention of attaching the responsibilities to a family member of the company’s membership obligations. This can be avoided through the provision in a shareholder’s agreement that allows the surviving shareholders to purchase the shares of the deceased. Comparable measures may be taken in the event that a shareholder loses the ability to act.
Minority and majority shareholder protection
A shareholder’s agreement may contain clauses requiring shareholder approval prior to the implementation of specific decisions. An additional way to ensure the protection of minority shareholders would be to establish a requirement that specific decisions require the unanimous consent of all shareholders. Ordinary decisions that necessitate unanimous agreement include altering the name of the organisation, amending its articles of association, relocating its registered office, and issuing additional shares.
There may be situations in which a third-party purchaser withdraws from a transaction in which they cannot acquire 100% of the company because a minority shareholder declines to sell their shares in addition to a shareholder who owns the majority of the shares in the company. The implementation of ‘drag along’ provisions within a shareholder’s agreement can effectively mitigate this issue. Such provisions stipulate that in the event that a majority shareholder wishes to sell their shares to a third party, they may compel the minority shareholders to do the same.
Rights to confidentiality and documents
In addition to addressing the public availability of company information, shareholder agreements may also specify the rights of individual shareholders with regard to particular business documentation. These may consist of financial records, meeting minutes, and an assortment of other documents.
Organisational Stability
When seeking to raise capital, a shareholders agreement provides the bank and creditors with assurance of stability. Additionally, it aids in defining the potential course of action should the business be put up for sale in the future and reaffirms its stability to potential purchasers.
A range of dividends
When shareholders hold varying proportions of shares, it is critical to establish a shareholder’s agreement that defines a varied dividend policy. This will enable the payment of various dividends to all shareholders at a mutually agreed-upon rate. This can effectively mitigate future disputes and frustrations, particularly in the event that the organisation encounters a phase of reduced profitability.
How we can help
We have a proven track record of helping clients deal with the process involved in drafting shareholder agreements. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a shareholder agreement. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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