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What is a Shareholders’ Agreement and why would you want one?

A shareholders’ agreement is a contract between the shareholders of a company and usually the company itself.

It usually protects the shareholders’ investments in the company, ensures a fair relationship between shareholders and manages how the business is run. The agreement runs alongside other important documents, such as the Articles of Association.

When to make a shareholders’ agreement?

There is no specific point at which you are required to make a shareholders’ agreement. Some start-ups may wish to enter into a shareholders’ agreement in the early stages of trading. However, others may choose to make an agreement later on, after a change in the business’ circumstances.

Every shareholders’ agreement should be tailored to the individual needs of your business and its shareholders and directors.

What’s included in a shareholders’ agreement?

Typically, shareholders’ agreements outline a framework to follow in certain situations and when important decisions need to be made for the business. For example, a shareholders’ agreement may offer clear procedures for the following:

  • Decisions on whether new shareholders can join
    E.g. who should decide? What about the founders, do their rights remain the same?
  • What to do when someone wants to sell their shares?
    E.g. will shares be offered to a particular person first or to all shareholders? In what proportion will they be offered? Who will determine the price to be paid for the shares if an agreement cannot be reached?
  • What happens to the shares of a shareholder who becomes critically ill or dies?
    E.g. is it a family-run business? If so, should shares be passed on to family members? What if family members have had no involvement in the company or experience in the area
  • Major decisions e.g. changing company name, type of business etc.
    E.g. does there need to be a majority or unanimous consent? Does the amount of shares each person holds matter in their vote? Do founders need to consent?
  • Shareholders’ rights
    E.g. what if not all shareholders are directors? Do they get any additional rights (e.g. more access to financial information than they’re already entitled to.)? Should power be allocated/balanced through ‘voting’ and ‘non-voting’ shares?

Again, provisions vary according to the specific circumstances of your business and its shareholders.

New shareholders joining the company will have to agree to the terms of the agreement. However, we recommend that you review the shareholder’s agreement from time to time to ensure provisions are kept up-to-date and relevant to the current circumstances and structure of the business. For example, if a founder has left, provisions outlining their rights may be removed as they’re no longer necessary.

Shareholders’ personal situations will differ. Each shareholder should seek their own professional advice on the protection that the shareholders’ agreement provides and also the effect that it may have on their Wills, estate and tax planning.

If you would like to discuss a shareholders’ agreement for your business, contact Director and Head of our Corporate & Commercial team Peter Flowerday on 0115 9 101 316 or click here to send him an email

Posted on November 14, 2019

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