Shareholders Agreement - what they are and why you need one

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15 September, 2021

Owning a company on your own is great, it means you have ultimate control over any decision which the company makes, without having to consider what anyone else thinks. However, as soon as a company is owned by more than one person, things become a little more complicated. The more shareholders of a company, the more opinions and therefore, the greater the risk of conflicts arising. It is inevitable that not all shareholders will agree all of the time, making decision making more difficult at times. However, there are steps a company can take to make the running of a business easier, including entering into a shareholders' agreement.

At the time of incorporation of a company, the focus is often establishing and building the business. However, a shareholders' agreement is an essential document - even in relation to family owned companies, who may not see such an agreement necessary. While it is never too late to put a shareholders' agreement in place, it is wise for the shareholders to turn their minds to this from the outset. A well-drafted shareholders' agreement will set out expectations for the management of the company and the relationship between its owners. It will also provide a mechanism to manage disagreements and changing circumstances that may arise as time passes.

There is no standard form of a shareholders' agreement. Rather, it is a document that is tailored to meet the needs and desires of the shareholders of a particular company. Some of the key provisions which can be covered in a shareholders' agreement include (but are not limited to):

  • How key decisions must be made and what should happen in the event of a deadlock situation - both at board level and during shareholder meetings;
  • The process for preparing and agreeing business plans and budgets;
  • How directors are appointed;
  • Specific dividend policies;
  • Provisions relating to the transfer of shares and mechanisms to assist shareholders to remove a shareholder who may not be acting in the best interests of the company; and
  • Restrictive covenants which shareholders may be subject to whilst they are a shareholder and for a period of time after they cease to be a shareholder.

Unlike a company's Articles of Association, which are publicly available at Companies House, a shareholders' agreement is a private agreement between the shareholders. This is particularly attractive to shareholders who want to document confidential details relating to the running of the company - such as a specific dividend policy.

As a business grows, the structure of the company may change including a change of ownership. A shareholders' agreement can be amended at any time to reflect these changes with the consent of all of the parties to the existing shareholders' agreement.

Ultimately, a shareholders' agreement creates certainty around the rights and obligations of the shareholders, and can help avoid potential disputes that could otherwise become costly to resolve.

COVID 19 impact

Covid 19 has added further obstacles for companies and shareholders who may need to make important decisions about a company quickly, in order to keep up with the current, uncertain economic climate.

With COVID 19 very much still having an impact on businesses, it is vital that shareholders understand how decisions can be made and who must consent to certain decisions, before the company can take action. If you have a shareholders' agreement in place already, make yourself familiar with the decision making process to ensure that this is still adhered to when making quick decisions in response to COVID-19. Also, consider if your existing shareholders' agreement should be amended to include processes to follow in emergency situations including, what to do if a shareholder is not able to participate in such a process. If you do not have a shareholders' agreement, consider how your Articles of Association currently work and whether these provide you with sufficient protection or whether it is time to enter into a shareholders' agreement.

If you are a shareholder of a company that currently does not have a shareholders agreement we would recommend that you enter into one to protect the interests of the company and its shareholders sooner rather than later. If you have a shareholders agreement in place already we can carry out a review of the same and provide you with advice on if and how this can be updated. We can offer fixed fee packages for the review or preparation of a shareholders agreement. For further advice, please contact Rebecca McCann in our Corporate department via email or phone on 0333 207 1140. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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