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Why every company should have a Shareholder Agreement

What is a Shareholder Agreement?

In short, a shareholder agreement is what it says on the tin, an agreement between the shareholders of a company. The agreement contains terms that govern the ownership of the business, including the issue and transfer of shares and company management.

A Shareholder Agreement is not required to be filed at Companies House, unlike the Articles of Association, therefore the terms of the agreement can be kept private between the shareholders and the company.

But, why is such an agreement important?

1. Conflict

When a company first starts out, it is difficult to envisage any fall out between the shareholders, however by having an agreement in place which regulates what would happen in the event of a conflict, shareholders may be deterred from such fall outs. In any event, where such a fall out does occur, having an agreement in place means that it can generally be dealt with in a cost-effective way and minimise any conflict that could be detrimental to the business.

2. It offers protection

Where there are shareholders holding differing percentages of shares, it is important that both the minority and majority shareholders consider protection themselves. Minority shareholders will wish to avoid being outvoted or for "tag along" rights to be included which will allow for them to "tag" on to any sale of shares by the majority shareholders. Majority shareholders may want protection against minority shareholders withholding consent to a transfer in the event that they receive an offer for the entire share capital of the company.

3. Restrictions

The shareholders will want to ensure that their interests, and that of the company are maintained. A Shareholder Agreement can therefore impose restrictions (known as restrictive covenants) on the shareholders which can restrict shareholders from being involved in a competing business and prevent customers, suppliers and trade secrets from being taken from the company on setting up in competition. A Shareholder Agreement can also place confidentiality restrictions on the parties to the agreement to protect valuable information that is key to the business.

4. Share Transfers

Shareholders will want to plan for scenarios such as a shareholder wishing to sell their shares or if they pass away. On a practical level, a well drafted agreement can contain provisions to govern share transfers, such as pre-emption rights (the right of first refusal), compulsory transfer provisions and permitted transfers, this helps to minimise the risk in relation to such matters should they arise in the future.

5. A say in company management

The day to day management of a company is undertaken by the directors, not the shareholders. A shareholder agreement can compel directors to seek shareholder consent prior to taking key decisions such as incurring a large expense or making amendments to governing documents. This is particularly important where the shareholders and directors are not the same people.

It is never too late to put a shareholders' agreement in place and they can always be amended and updated as circumstances change (with agreement from all parties). Speak to one of the Corporate Team at Forbes to discuss their fixed fee package offered on Shareholder Agreements.

For more information contact Pauline Wild in our Corporate department via email. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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