05 August, 2019
This is a question we often get asked by our clients who are currently holding or are planning to hold shares in a company.
Although there is no legal requirement to have a shareholders' agreement, every company is strongly advised that they have one. Shareholders' agreements are a means to regulate the running of a company and the responsibilities of the shareholders, by setting out what can and cannot be done as well as providing details of the decision making process, amongst other things. By having such agreement in place the potential for conflict arising between the shareholders is reduced and the agreement facilitates smooth running of the company.
Many may take the view that a shareholders' agreement is unnecessary, particularly where the shareholders of a company get along or are family members. However, it is fundamental to put a shareholders agreement in place at the outset of starting any new business, rather than further down the line when opinions diverge and circumstances change, leading to potentially irreconcilable differences and detrimental effects to the business.
Some of the key benefits of having a shareholders' agreement include:
1. Greater shareholder protection
The agreement will sit alongside the company's articles of association, but can give shareholders greater protection than is sometimes provided by the articles alone. Many companies are often set up quickly and cheaply, using Model Articles which do not provide detailed provisions regarding certain shareholder protection, nor do they define the extent of their responsibilities. Therefore entering into a shareholders' agreement allows members of a company to include such detailed provisions to suit their needs.
2. Bespoke, tailored document
A shareholders' agreement is a completely tailored and bespoke document to suit the individual needs of each company and its members.
Generally, companies are subject to the Companies Act 2006 (CA) which governs how a company should run. However, save for some provisions under the CA which cannot be varied or contracted out of, a shareholders' agreement can contain arrangements agreed between the shareholders which may vary what would otherwise be the legal position under the CA, to provide a more appropriate document for each individual company.
3. Facilitates the decision making process in a company
Unless agreed otherwise, the management of a company is determined predominantly by the board of directors, whilst certain key decisions under the CA (i.e. decisions relating to ownership) are required to be approved by shareholders in general meetings or via written resolutions. This highlights the importance of having such an agreement in place, as it can provide further clarification regarding the basis for decision making, by allowing shareholders' the ability to restrict the power of directors where necessary and to provide greater protection for the parties involved in the ownership of the company which is otherwise provided in the CA.
4. Protects the rights of minority shareholders
A shareholder agreement can be a useful tool in protecting the rights of minority shareholders and the investment value of their shareholding. Without such an agreement, majority shareholders may force issues which are not in the minority shareholders' best interests. However, a shareholders' agreement can include provisions which prevent majority shareholders passing certain resolutions regardless of whether they have the necessary shareholding required under the CA to pass such resolution.
Further, once in place a shareholders agreement can usually only be amended with the agreement of all of the shareholders whereas a company's articles of association can be changed by a special resolution of the members ( i.e. 75% majority) meaning that a shareholders' agreement provides further protection for minority shareholders, as opposed to just relying on provisions in the Articles.
5. Confidential document
Unlike a company's articles of association, which is a public document made available at Companies House, a shareholders agreement remains private and confidential and will not be open to view by others who are not a party to the agreement. Therefore, shareholders' can include specific details relating to the management of the company which they may not wish to be made public, for example specific dividend policies.
6. Cost efficient
An enforceable shareholders agreement is a cost efficient way to minimise any potential business disputes between shareholders by making it clear how certain decisions are made and also by providing a framework with clear procedures for dispute resolution, which aims to avoid the need to enter into drawn cut negotiations and potential court proceedings.