Shareholders Agreements – Who Needs One and Why

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A bit like pre-nups before marriage, shareholders agreements are often maligned. Seen by some as a sign that you expect things to go wrong in the future, insisting one is put in place when setting up a business could rock the boat before the business has even taken off.

In reality, however, a shareholders agreement is just a contract between the shareholders of a privately owned company that deals with how its shareholders intend to manage the company, also setting out each of the shareholder’s roles and responsibilities. Put in place to protect the shareholders of a company and indeed the company itself, a shareholders agreement can be useful in many everyday business scenarios as well as being a priceless tool should circumstances call for it to be relied upon.

A shareholders agreement is advisable for any private company that is made up of two or more shareholders. Perhaps controversially, this also includes family businesses, which are reported to make up approximately 2 out of every 3 private businesses in the UK but amongst which shareholders agreements are particularly uncommon. Similarly, many companies that operate as partnerships do not have a shareholders agreement in place, relying instead on the trust held between the business partners at the time of incorporating the company. Although shareholders often start out on the ‘same page’, with shared goals, ideas and aspirations, things can quickly change and shareholders agreements can come in extremely useful; especially if the relationship turns sour in the future.

Sometimes, it is events that lie entirely beyond anyone’s can control that see the value of a shareholders agreement come to the fore. If, for example, a shareholder in a business was to pass away, the absence of an agreement that sets out what happens to the company’s shares on the death of a shareholder could, in certain circumstances, leave the relatives of the deceased retaining a shareholding in the company. Most likely, this would not to be a favoured outcome for the remaining shareholders.

Other eventualities that can be covered in a shareholders agreement include:

  • Rights to appoint directors
  • Voting rights of the shareholders
  • Dividend policy
  • Issue and transfer of shares
  • How shares will be valued
  • Dispute resolution
  • Restrictive covenants
  • Minority shareholder protection

Without a shareholders agreement in place, the above situations will automatically be governed by Company Law; perhaps leading to outcomes that are not in the best long term interests of the company and almost certainly being likely to go against one or more of the shareholders’ wishes.

Although not always eventualities that business owners/directors/shareholders like to contemplate, there is little doubt that putting a shareholders agreement in place whilst all parties are getting along is far better than having to try and find a workable solution, or else wind up in litigation, should the relationship between shareholders deteriorate.

DRN’s corporate solicitors are able to advise business owners, directors and shareholders on the use of shareholders agreements. Although recommended at the point at which a company is formed, shareholders agreements can actually be put in place at any time. Our skilled and experienced team can guide company shareholders through the process, helping to navigate and negotiate the potential issues to be covered. For further help and advice, please contact our corporate team today.