Compelling reasons why your Company should have a Shareholders Agreement

Article

17 February, 2016

Any Company with more than one Shareholder would be best advised to have a Shareholders Agreement in place in order to regulate the way business between the Shareholders is conducted. The requirement to have such an agreement in place is often overlooked due to the costs and time implications of implementation and the fact that a Shareholders Agreement is not a legal requirement for a Company often pushes it to the bottom of a long list of priorities. There are however a great many compelling reasons to have a Shareholders Agreement in place and with Forbes offering Shareholders Agreements on a fixed fee basis it may well costs less than you have been expecting.

Although it often seems pessimistic to contemplate the Shareholders becoming embroiled in acrimony, especially at the start of a new business relationship, it is an unfortunate truth that often disagreements between shareholders do occur. A Shareholders Agreement can formalise the position on such an event so that the Shareholders are not left in the impossible position of trying to reach an agreement after the event. It is worth noting that a Shareholders Agreement does not have to be filed at Companies House and can remain confidential between the parties.

If you are a minority Shareholder in the Company then there are provisions that can provide for your protection within the agreement, for example the agreement could contain rights that enable a minority shareholder to tag along on a majority shareholder share sale to avoid any minority shareholder finding itself in business with an unknown entity. Alternately, the agreement may contain protection for majority shareholders, for example allowing them to force the holders of minority shareholdings to participate in share sales where a third party buyer wishes to acquire the entire share capital.

The agreement can also be used to control the transfer of shares in the Company. Shareholders Agreements commonly provide rights of pre-emption, where a Shareholder wishing to transfer its shares first has to offer such shares to the remaining shareholders and thus restricting who may acquire shares in the Company. The agreement could also contain deemed transfer provisions, providing that if a shareholder commits a certain act it will be deemed to have served a transfer notice and forced to sell its shares to the remaining shareholders. These deemed transfer provisions can be linked to events that are considered neutral, such as where a shareholder dies its shares would pass to the remaining shareholders or also to events perceived as bad, such as a shareholder who is also a director of the Company committing an act of negligence or misconduct. Different valuation mechanisms can be provided for dependant on whether the leaver is 'good' or 'bad' and any 'bad' leavers can be penalised by having to transfer their shares at a lower or even nominal value.

Another common provision in the agreement is a restriction on the Shareholders behaviour post exit from the Company in terms of competing with the Company. Such provisions are valuable in protecting the Company post exit of a Shareholder.

A Shareholders Agreement can help to regulate the management of the Company. The Shareholders may be happy for the day to day running of the Company to be left to the directors however may wish for certain matters to be reserved to the Shareholders. This can be provided for in a Shareholders Agreement.

These are merely a small selection of the reasons a Company should have a Shareholders Agreement in place. At Forbes our experienced Solicitors are able to discuss your individual requirements and prepare a bespoke agreement tailored to your Company's specific needs. Additionally we are able to provide Shareholders Agreements on a fixed fee basis so that you know exactly what the costs will be from the outset.

If you have any questions about Shareholders Agreements or require assistance with any other corporate matters then please do not hesitate to contact Jenny Burke.

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