A shareholders’ agreement is an agreement between the shareholders of a company, put in place to protect shareholders. Both the contract and the company’s articles of association should be tailored to your businesses needs, as it is not always a ‘one size fits all’ approach. Paul Westwell is the firm’s Managing Partner and a commercial solicitor at Bromleys. Here, Paul shares ten reasons why it is important to have an agreement prepared:
To create certainty
Having an agreement in place provides the shareholders with clear objectives and direction. That way, there is no second guessing and less chance of confusion between shareholders. The information presented within the contract is also confidential which means financial and commercial information can be placed into the agreement.
It can sometimes be difficult, especially at the beginning of a new business relationship, to foresee a situation in which those involved in the business relationship would fall out or struggle to make decisions due to conflict.
However, disagreements do happen and trying to agree the provisions that should apply when conflict has begun is almost impossible. Therefore, it is important to have this in the agreement from the outset of the relationship so it can provide a clear position if a despite arises between the shareholders.
The agreement will contain specific provisions dealing with disputes including mediation or arbitration. This helps to protect the business from lengthy and costly disputes by resolving the dispute as soon as possible.
Offers protection to minority shareholders
Some decisions can be reserved for unanimous shareholder consent. Tag-along rights can also be inserted so that if a majority shareholder is looking to sell their shares, they can’t leave the minority shareholder behind and will look for a deal where all shares are sold.
Offers protection to majority shareholders
Alternatively, drag-along provisions can be inserted into the agreement whereby the majority shareholder can force the holders of the remaining company shares to accept an offer, so they do not prevent the deal from going ahead.
Management of the day to day
The agreement should include provisions which deal with the day-to-day management of the company.
Certain decisions may require shareholder approval, particularly where the shareholders are not the company directors. An example of this is how directors are to be appointed to the board.
Control over the transfers of shares
If there is not a provision in the agreement regarding the transfers of shares, shares may be freely transferrable. Provisions can be inserted into the agreement whereby if a shareholder is looking to sell their shares, they must first offer their shares to the remaining shareholders, giving them first refusal.
Throughout the life of a company, it can be expected that shareholders and directors will not see eye to eye in certain situations. If a decision cannot be agreed between parties, this will result in a deadlock, potentially bringing the company’s business to a holt. Having deadlock provisions in place means the business doesn’t suffer because of the shareholder’s inability to reach an agreement.
The shareholder’s agreement can contain restrictions so that the shareholder cannot set up a competing business or poach key employees.
Clear dividend policy
The shareholders’ agreement can include specific policies about declaring dividends. Having a dividend policy can provide structure and flexibility. Often a company will have different classes of shares and the agreement will allow different dividends to be payable to each shareholder.
Shareholding linked to employment
Having something in place within the shareholder agreement can provide a ensure that a shareholder’s right to hold their shares is linked to their employment status so if they leave the company’s employment, they will have to sell their shares.
How can we help?
At Bromleys we are always ready to assist if you need advice on what to include in your shareholder’s agreement, or if you wish to discuss how you can best tailor this to suit your needs then please contact our corporate and commercial team today. Our experienced solicitors are here to provide a helping hand in the complex world of corporate law.
You can call us on 0161 330 6821 or make an enquiry directly with our Corporate and Commercial Team: