Should You Bother with a Shareholders’ Agreement?

 

You are not legally obliged to have a Shareholders’ Agreement – but it is an extremely good idea to put one in place. Here’s why.

Increase Control

Without a Shareholders’ Agreement, a company will be governed by general company law. This dictates that only certain decisions require the involvement of shareholders. Consequently, the board of directors could make significant changes without even consulting you. Furthermore, the other shareholders may make important decisions in your absence. This may even be tactical if they know you would otherwise block a particular motion.

A Shareholders Agreement can place restrictions on the decision-making process, stipulating that all shareholders must consent to certain decisions. The exact nature of these requirements can be tailored to your specific needs. The result is that the shareholders retain greater control over the management of the company, ensuring they have a say in the day-to-day running of the business.

Plan for the Future

While you may be working in perfect harmony now, it is very likely that there will come a time when at least one shareholder will want to leave the company and/or sell their shares. A Shareholders’ Agreement can plan for this eventuality, providing a framework for everyone to follow. This will significantly reduce the risk of a disagreement escalating into a full-blown dispute – something which can be extremely detrimental to the business.

The agreement can set out exactly how shares should be valued. It can also determine whether the other shareholders are legally obliged to purchase the shares, or whether they have the option to. Often, the remaining shareholders will have the right of first refusal, meaning they have the opportunity to purchase the shares before anyone else. If this opportunity is not taken up, the shares can be offered to an external buyer.

Prepare for Death or Incapacity

Although it is morbid to consider, there may also come a time when a shareholder dies or loses mental capacity. Again, a Shareholders’ Agreement can prepare for this scenario. Otherwise, the shares will automatically pass to the deceased’s main beneficiary (in the event of a death) or their Attorney/Deputy (in the event mental capacity is lost). This person might not be equipped to deal with the ins and outs of business.

To avoid this, a Shareholders’ Agreement can state that should a shareholder die/lose capacity, the other shareholders have the option to buy those shares. This prevents the shares from passing through a deceased person’s estate or being held in limbo, as often happens when mental capacity is lost. The shareholders can then continue with the running of the business, without inadvertently acquiring a new (and potentially inappropriate) shareholder.

Prevent Shareholder Disputes

As the old saying goes, prevention is better than cure. When it comes to shareholder disputes, a Shareholders’ Agreement can act as a prophylactic, preventing a dispute from occurring in the first place. This is because you can set out what can and cannot be done at the outset, ensuring everyone knows what is permitted and what is expected of them. This can significantly reduce the chance of a dispute occurring.

If a shareholder dispute does arise, then a Shareholders’ Agreement can stipulate how it should be dealt with. This can often lead to a quicker and more cost-effective resolution that litigation through the courts, as there is already a plan in place. This is important, as a full-scale dispute can be extremely disruptive for a business. It can even reduce its value, potentially leading to the collapse of the company.

Protect Minority Shareholders

As mentioned above, it is possible to include a clause in a Shareholders’ Agreement, stating that certain decisions require the unanimous consent of all shareholders. This might include the issue of new shares, for example. This works to protect minority shareholders, who can otherwise be pushed out of the decision-making process and controlled by the majority shareholders, putting them in a vulnerable position.

Protect Majority Shareholders

On the other hand, a Shareholders’ Agreement can also be used to protect the interests of majority shareholders. One example is the inclusion of a ‘drag along’ clause. This forces minority shareholders to sell their shares, in the event that a majority shareholder wishes to sell the company. This will be necessary if a third party wants to purchase 100% of the company, rather than a set number of shares.

Ensure Privacy

A Shareholders’ Agreement is private and confidential. You can keep the terms of the agreement entirely to yourselves, rather than publishing it in the public domain. This allows for a greater degree of privacy than, say, articles of association which must be registered with Companies House.

Speak to our Solicitors

So, should you bother with a Shareholders’ Agreement? Yes, we think so. Ultimately, it allows for preparedness, protection and control. These are all vital elements for a successful business. There is a small expense in having the agreement drawn up. Yet when you consider the potential implications of not having a Shareholders’ Agreement, any fees pale in comparison.

If you would like to put a Shareholders’ Agreement in place, please contact us today at Altion Law for a confidential discussion.

Call us on 01908 414990 or complete our online enquiry form and we will get back to you.