A shareholders’ agreement is an agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It will also govern the way in which the company is run. It may be usual to combine the use of a shareholders’ agreement with a specifically drafted set of articles of association for your company. When incorporating a company with two or more shareholders, a shareholders’ agreement is a key consideration. Although it is not a legal requirement, its purpose is to further regulate the way business between shareholders are conducted.
When starting a small business, it is easy to forget about creating a shareholders’ agreement. However, there are a number of advantages in creating one right at the start.
In this article, small business shareholder agreement, we consider the process and mechanism involved.
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Why should a small business use a shareholders’ agreement?
- Protection for minority shareholders
A shareholder’s agreement can safeguard minority shareholders by requiring the approval of all shareholders, not just the majority, for certain decisions, such as the company’s capacity to issue additional shares.
Disputes do occur, and majority shareholders frequently adopt decisions that are opposed by minority shareholders. In the absence of a shareholders’ agreement, majority shareholders will control the company. The minority shareholders’ other option is to pursue a claim but there are associated costs involved and this strategy does present risks.
- Shareholders have decision making rights.
Directors are accountable for the day-to-day operations of a business. Certain shareholders may believe that certain choices should not be left up to the directors’ discretion. They may prefer to make decisions such as approving a financial transaction that exceeds a determined amount on their own. This is especially important in situations where company directors are not also shareholders.
- Direction and stability for the company.
A shareholders’ agreement can offer structure and direction. It means that the shareholders have in place methods to handle future events and/or conflicts. They are frequently seen favourably by lending institutions and/or creditors, which can be advantageous when obtaining credit facilities.
- The sale and creation of shares.
A common situation involves the selling of shares or the creation and distribution of new shares. A properly structured shareholders’ agreement will allow a shareholder to sell his shares to the remaining shareholders and/or the firm before selling them to outside parties. This is advantageous because it prevents individuals (who may be complete strangers to the remaining shareholders) from purchasing company shares. Additionally, there should be provisions for valuing the shares, which should prevent further conflict throughout the valuation process.
- Options for share valuation mechanisms.
In many companies (especially tech start-ups), directors and/or senior employees are incentivized with company shares. If their job and/or directorship ends (even a friendly departure), a well-drafted shareholders’ agreement will permit their shares to be returned and/or sold; otherwise, the departing director and/or employee may maintain the right to dividends and/or voting rights despite having gone. A correctly prepared shareholders’ agreement may incorporate features that allow for varying valuation mechanisms based on the circumstances surrounding the termination of the connection with the company. This may be a crucial factor for the shareholders.
A shareholders’ agreement may also provide a flexible dividend policy that permits different pay outs to be paid to shareholders based on the class of shares they possess. When adding rights to newly created shares, the same flexibility may not always apply.
A shareholders’ agreement may also have “drag along” clauses. When an offer to purchase all of a company’s shares is received, the majority shareholders can force the minority shareholders (who may oppose the sale) to accept the offer.
- Resolving possible shareholder disputes.
A shareholders’ agreement should include rules for handling potential disputes. These can involve mediation and/or arbitration and are typically significantly less expensive and faster than court proceedings.
How we can help
We have a proven track-record of dealing with shareholder agreements for small businesses. We will guide you through the process 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.
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How to Contact our Corporate Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form . 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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