A shareholders’ agreement is a legal contract made by the people who own a company together. It resembles a set of rules that each person agrees to follow.
Why do you need it?
It is wise to enter into a shareholders’ agreement when setting up a company with your business partner or partners. It clarifies the company arrangement and your position as shareholders, including how much money each person is investing, the number of shares you will hold, what happens if someone wants to sell their shares, and the payment of dividends.
A shareholders’ agreement encourages individuals to consider potential issues at the start of incorporation rather than when those issues inadvertently surface later down the line, during the growth of the business.
You could equate it to a business will or a prenuptial agreement.
Here are some common questions regarding a shareholders’ agreement:
Is having a shareholders’ agreement mandatory, and is it a public document?
No, it is neither a public document nor mandatory because all companies, by law, have the Articles of Association, which are public documents available for view at Companies House. Therefore, a shareholders’ agreement may contain other provisions that the shareholders would like to add, which they would prefer not to be made public.
Whilst a shareholders’ agreement is not mandatory, it makes commercial sense to enter into one, because it contains the rules for the shareholders. Therefore, should a problem or disagreement arise during the company’s tenure, the shareholders can refer to the shareholders’ agreement for the answer. It helps prevent and resolve potential disputes, thereby maintaining a harmonious business relationship between the shareholders.
What are the benefits of having a shareholders’ agreement?
Although most businesses think that the Articles of Association are enough, there comes a time when disputes or issues arise that are not covered by them. For example, if a shareholder dies suddenly, you could include a provision in the shareholders’ agreement which dictates that shares be passed onto the next of kin. It is unlikely that such provision of this kind would be included in the basic Articles of Association. The benefit here lies in the shares staying in-house, meaning the shares would not be sold immediately to outsiders, which may cause trouble for the company.
Shareholders’ agreements therefore deal preemptively with those issues that may not be thought of when starting a company with a business partner.
What happens if a shareholder wants to transfer their shares?
By law, a shareholder must offer their shares to the other shareholders. It’s called a pre-emption right. A shareholders’ agreement allows you to add a few more layers, exemptions, or rules. For example, a company may require the unanimous agreement of all the shareholders.
What’s the difference between a shareholder and a director?
The main difference between these two is ownership. Typically, a director is someone in charge of the day-to-day operation of a company; however, they do not own the company. Whereas a shareholder may not be actively involved in the day to day running of the company, they own it as someone who has invested money into it. Shareholders may also be considered directors if they are running the business themselves.
Can a shareholder be forced to sell or give up their shares?
You cannot force anyone to sell their shares without a shareholders’ agreement, since the person selling must sign a transfer form. However, in a shareholders’ agreement you can include ‘bad leaver’ provisions that require any shareholder to sell or relinquish their shares for a particular reason, for example, being criminally convicted or declared bankrupt. As long as there is evidence, the individual’s shares can be legally seized, and the other shareholders could force the individual out.
A shareholders’ agreement can be thought of as blank canvas, in which you can pick and choose the terms you want the shareholders to adhere to, that makes most commercial sense for the company and its members. Upon signing the shareholders’ agreement, it becomes legal and binding, so it is crucial that the terms are agreed between the shareholders.
We can help you draft your shareholders’ agreement at Carter Bond Solicitors. Get in touch with us today for more information on our services.
