Legal BlogsShareholder Agreements – Do I Need One?

30/03/2023

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The importance of a shareholders’ agreement should not be underestimated.
Having a well-drafted shareholders’ agreement in place can add strength and certainty to the understanding between shareholders and provide a source of protection in the event of a relationship breaking down.

 

 

What is a Shareholders Agreement??

A shareholders’ agreement is a written contract between the shareholders of a company, and often the company itself, which dictates the operation of agreed matters such as how shares will be transferred, what restrictions are imposed, exit plans, and other matters. It provides for both personal rights and obligations imposed as a shareholder.

Amidst the excitement of entering a new company, it is easy to get stuck into the day-to-day running of the business without considering the possibility of a major dispute arising and how this will be resolved. Whilst it is not an event anyone wishes to imagine, despite good faith, disagreements will undoubtedly occur during the life of a company. A shareholders’ agreement can include a dispute resolution mechanism which can be invoked in the event of such disagreements.

Disputes can be costly and time-consuming for a company. A shareholders’ agreement is a cost-effective way to minimise the potential for disputes simply by providing the framework for the decision-making process.

 

Benefits of a Shareholders’ Agreement?

There are many benefits of a shareholders agreement, to list a few, the main benefits are:

 

Governance: 
Where the board of directors are responsible for the daily management of the company, shareholders possess limited rights. A shareholders’ agreement can hold directors accountable for certain actions and compel directors to seek the approval of shareholders where the constitution requires it. This is vital where the directors are not shareholders.

Protection for minority shareholders:
A shareholders’ agreement can protect minority shareholders by requiring unanimous consent of all shareholders for certain reserved matters. ‘Tag along’ provisions may also be included in the agreement, permitting minority shareholders to ‘tag along’ in the event of majority shareholders seek to sell their shares to a third-party buyer. These provisions ensure that minority shareholders have the right to receive the same price, and terms and conditions of sale.

Protection for majority shareholders:
Alongside ‘tag along’ provisions, a shareholders’ agreement often includes ‘drag along’ provisions. ‘Drag along’ provisions enable majority shareholders to force minority shareholders to accept an offer for their shares in order to allow a deal to proceed.

Deadlock:
Shareholders do fall out. Where a conflict arises and there is an inability to reach an agreement, the resulting effect is deadlock meaning the company may be brought to a standstill. A shareholders’ agreement can alleviate this risk by outlining the mechanism for a quick and effective resolution procedure with deadlock provisions. These provisions often provide a step-by-step guide for parties to buy each other out.

Transfer of shares:
In the absence of pre-emption provisions either in the articles of association or a shareholders’ agreement, shares may be transferred to a third party. This poses a risk of shareholders selling to a competitor or an unknown person. Incorporating a shareholders’ agreement can grant existing shareholders with pre-emption rights in the event of a shareholder wishing to transfer or sell their shares. In addition to rights of pre-emption, the shareholders’ agreement can detail compulsory transfer provisions (a deemed transfer of shares in certain situations), and other permitted share transfers. “Tenants cannot sub-let the property if the EPC rating is F or lower”

 

What are the risks if you do not have a Shareholders’ Agreement?:

The legal risks presented to shareholders lacking a formal agreement are often dependent on the percentage of the shareholding and the company’s articles of association. However, both minority and majority shareholders can be caught out by relying solely on the articles of association.

 

Consider the impacts of the following scenarios:

• A minority shareholder blocks the sale of your business.
• Your shareholders learn the mechanics of your business success and subsequently leave to set up a competing business and add further detriment by poaching your customers and staff.
• You gave shares to an employee to incentivise and reward them and now they want to leave, however, there is no agreement in place to prevent them from retaining their shares and competitive company knowledge.
• A dispute occurs and you have no clear direction to resolve it causing further conflict regarding the resolution. This can be time-consuming and expensive which may have a damaging effect on the business.
• Investors are apprehensive about investing funds into the business due to the absence of a shareholders’ agreement.

These are just a few examples of the impacts in the event of there being no shareholders agreement. The law and the company’s articles only extend so far, and it is much better to avoid these problems from the outset.

 

Summary:

Although a Company’s articles of association cover a broad range of generic and common circumstances that shareholders are frequently faced with, a shareholders’ agreement can offer a more specific agreement that can assist in complicated situations. A shareholders’ agreement can complement the articles of association but will also supersede the articles where applicable.

 

 

Whether you already have an agreement that needs reviewing, or you would like to put one in place, please contact us at info@bertramfairbanks.co.uk or 01392 770380.

 

Written by Kirstie Johnson
TRAINEE SOLICITOR

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This article is provided by Bertram Fairbanks for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. Professional legal advice should always be obtained before taking any action relating to this article. If you would like to discuss any of the matters covered in this article, please contact us.

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