Partner Debbie Brett, in our Corporate & Commercial team, explains why shareholders' agreements are key for any business.
If you’re setting up a business, you may have heard about shareholders’ agreements but might not fully understand what they cover or why they matter. In this blog, we’ll break down what a shareholders’ agreement is and why it should be considered a cornerstone document when it comes to company governance.
What is a Shareholders' Agreement?
A shareholders’ agreement is a private contract between the shareholders (owners) of a company. Unlike the articles of association, which are publicly available at Companies House, and set out the basic rules for running the company, a shareholders’ agreement deals with the relationship between the shareholders themselves. It can cover topics such as how decisions are made, how disputes are resolved and what happens if someone wants to sell their shares.
For example, imagine two friends set up a company together. They each own 50% of the business. A shareholders’ agreement could spell out how major decisions are made (such as taking on investment or hiring a new director), what happens if one shareholder wants to exit the business, and how dividends are to be paid, amongst other things.
Why is a Shareholders' Agreement Important?
A shareholders’ agreement brings clarity and certainty to the table. When parties know and agree to their rights and obligations from the outset, this agreement stands as a key protective document, ultimately saving shareholders time and money should disputes arise or changes occur in business ownership.
If a dispute does occur, a shareholders’ agreement that is tailored to the specific needs and requirements of those involved will provide a clear structure for resolving conflicts swiftly and fairly.
The agreement can also set out the process for a shareholder leaving the business, whether that be through selling their shares, becoming incapacitated, facing bankruptcy, or passing away. For instance, it may grant the remaining shareholders the first opportunity to purchase the departing shareholder’s shares, thereby keeping control within the existing group.
Not every shareholding is equal, and in many cases, minority shareholders (those with a smaller percentage of shares) may be afforded specific protections within a shareholders’ agreement, such as the right to participate in important decisions. On the other hand, certain safeguards may be provided to majority shareholders (those with a larger percentage of shares) as well; for example, if all shares are being sold, the agreement might require minority shareholders who are not aligned with the sale to take part, ensuring smoother transactions.
The important thing to note is that a shareholders’ agreement is not something that should be “one-size-fits-all”. It should be a bespoke document that reflects the specific wishes of the specific shareholders.
Who Needs a Shareholders' Agreement?
While not technically legally required, shareholders’ agreements are very much recommended and are especially useful for private limited companies with more than one shareholder. They’re commonly used in start-ups, family businesses, and companies set up by friends or business partners, though even the most established and sophisticated businesses will have one in place.
It is important that these agreements are reviewed periodically, to ensure that any changes in ownership, regulations and management are reflected.
Invest in Future Peace of Mind
A well-drafted shareholders’ agreement is a vital tool for any company with more than one shareholder. It provides a safety net if things go wrong and offers reassurance that everyone’s interests are protected. At its heart, a shareholders’ agreement is about clarity and fairness and helps your business to run smoothly by giving all shareholders peace of mind now and in the future.
For further information or legal advice on shareholders’ agreements or other corporate law matters, please email law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
