Why are Shareholders’ Agreements So Important?

Having a strong shareholders’ agreement in place is important for a number of reasons. Not only does it document the understanding between shareholders when it comes to certain matters, which can provide clarity, but it can also safeguard shareholders in the unfortunate event of a communication breakdown.



What is a Shareholders’ Agreement?

A shareholders’ agreement comprises a contract between all shareholders of a company, which sets out the agreed matters between them - such as how shares can be transferred, how dividends are payable, non-compete restrictions and exit plans. It grants shareholders personal rights, whilst also imposing personal obligations upon them. The agreement can also offer protection to minority and majority shareholders, regulate the transfer of shares, impose restrictions, govern decision-making and more.

It can be very easy for individuals to go into business together and hit the ground running, without considering what would happen if there was a major fall out. Despite good intentions, there will naturally be times in business where disagreements happen. A shareholders’ agreement can include a dispute resolution clause which can be utilised if professional relationships break down, and will give all parties a structured plan during uncertain times.

Why Should Shareholders’ Have an Agreement?

Some of the key benefits of a shareholders agreement include:

●     In the event of a disagreement, a well-drafted shareholders’ agreement can provide a dispute resolution procedure to follow, with the aim of resolving the issue swiftly in order to protect the company’s assets. A shareholder’s agreement might also prevent disputes from escalating, as it can assist in clarifying any misunderstandings.

●     It can safeguard minority shareholders, such as providing for matters that require their consent, or “tag along” rights - any sale of shares by majority shareholders that allow the minority to “tag” onto that sale.

●     It can also safeguard majority shareholders by allowing them to oblige minority shareholders to sell their shares if an offer is received for the entire share capital of the company.

●     It can lay out agreed provisions relating to company management at the director level, which helps to clarify how the company should be run on a daily basis. For example, detailing matters that would require the consent of the shareholders, or allowing specific shareholders to appoint directors.

●     It can impose restrictions on shareholders, limiting their ability to be involved in any business that competes with the company that they hold shares in.

●     It can impose confidentiality obligations on certain parties in order to help protect valuable information, both whilst the parties are involved in the company and afterwards.

●     It can outline what will happen in the event that consent is required by two or more parties, and such consent is not forthcoming. As a result, the inaction may adversely affect the company’s business. Deadlock provisions can be included in an agreement which details the mechanics of how the deadlock will be resolved, the answer to which is generally that parties buy each other's shares.

Should I Seek Legal Advice For a Shareholder’s Agreement?

It’s always advisable to seek out legal advice when dealing with any legally-binding agreement. Here at Paddle & Cocks Ltd, we can negotiate and draft all terms of a shareholders’ agreement and all associated articles on your behalf. If you have any questions about our corporate law services, please contact us today.