Starting a business with a friend or family member?
What do you need to know about being a shareholder?
If you raise finance by selling shares in your business, have you thought through all the implications? What is a Shareholders’ Agreement and do you need one?
You might like to know that many limited companies choose to draw up a shareholders’ agreement to deal with any potential future issues.
What is A Shareholders’ Agreement?
It’s a legal document that outlines the rights and responsibilities of shareholders, regulates their relationship with one another, confirms how a company should be managed, and clarifies the way in which decisions can and cannot be made. It lays out the rules.
You’ll find this is useful document to put in place because it covers exceptional events like the death of a shareholder, which can create a number of problems for the remaining shareholders.
A shareholders’ agreement usually contains a provision of pre-emption rights of existing shareholders – which requires available shares to be offered to existing shareholders before anyone outside of the company.
If no such agreement is in place, you may find shares can be offered to individuals who lack the necessary business knowledge and experience to support the company’s vision or business plan. This could have a negative impact on the control of the remaining shareholders and, ultimately, the success of the business.
Our Top reasons for having a shareholders’ agreement in place
- An agreement provides greater protection for limited company shareholders by allowing more specific provisions than those contained in the standard articles of association.
- Provisions or arrangements can be included that apply to individual and current shareholders only – the provisions in the articles are generalised and apply to all current and future shareholders.
- An agreement provides an effective framework for resolving disputes between shareholders.
- Unlike the articles, a shareholders’ agreement is a private and confidential document that the public has no access to.
- An agreement shows the unity and stability of the shareholders, which can be appealing to banks and investors.
- An agreement can protect the interests of shareholders and their beneficiaries in the event of the death of a shareholder.
- A Shareholders agreement can provide better protection for the rights and investment value of minority shareholders.
- The agreement outlines dividend policies and distribution of profits.
- An agreement can specify decisions that require a 100% majority vote of the shareholders.
- It can clarify the particulars of pre-emption rights.
- An agreement allows shareholders to restrict the powers of company directors.
- An agreement can be used to set out the terms of a director’s salary.
- It usually provides for the regulation and restriction of the allotment or transfer of shares.
- An agreement can outline the terms of selling or closing the company.
How to arrange a shareholders’ agreement
Usually, a shareholders’s agreement should be discussed and drawn up as soon as a company is formed in order to minimise disagreements and internal conflicts further down the line, but it is still possible to introduce one, at a later stage.
Standard shareholders’ agreement templates are available on-line and you can also create bespoke agreements with a variety of legal companies on-line.
We recommend consulting a solicitor for the most appropriate and up to date legal advice. We always advise that you set up a Shareholders Agreement if there’s more than one shareholder.
For more info e-mail firstname.lastname@example.org or call 01603 516 304 for a free chat