Do I Need a Shareholders’ Agreement?

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A shareholders’ agreement is exactly what the name suggests; a legal agreement between shareholders in a company which helps regulate their relations. If you are a sole shareholder there is therefore no need for a shareholders’ agreement. However, if there is more than one shareholder in a company, it is almost always advisable to have a shareholders’ agreement in place.

When shareholders decide to work together, everybody is likely to be in agreement and it can seem almost superfluous to set out the terms of the relationship in an agreement. This though is undoubtedly the best time to do it because, when disagreements begin to form, it is almost always too late to put a shareholders’ agreement in place.

Even if the shareholders do not fall out in the true sense, it is likely that over the years, their views on the best direction for the company (and for themselves) will change and evolve; often in different ways. Without a shareholders’ agreement this can be very difficult to manage.

A shareholders’ agreement can include a wide variety of provisions, but some of the points that you often need to consider are:

• Details of any equity investments and the financing of the company;
• Details of the business of the company and how it will be run;
• How decisions will be made and any critical decisions that require special consents;
• What happens if the shareholders fall out (dispute resolution provisions);
• The appointment and removal of directors;
• Exit provisions: How shareholders will realise their investment and share transfer provisions/restrictions;
• Provisions to protect the interests of the company, including non-compete provisions and non-solicit provisions; and
• Information rights for the shareholders.

Although they all serve their purpose, probably the most important provisions are the exit provisions and the dispute resolution provisions; especially in a 50-50 joint venture.

Where shareholders have an equal number of shares, they are capable of blocking each other’s vote and creating a deadlock. A deadlocked company cannot continue business effectively and therefore, unless the shareholders can agree on a way forward, the company will often be dissolved; taking a lot of its goodwill with it.

The exit provisions can also be of fundamental importance to the on-going life of the company. Eventually, one of the shareholders is likely to want to leave the business, probably looking to sell onto another person. How and when they can do this is critical both to their ability to leave, but also to the remaining shareholder’s ability to continue with the new shareholder (or possibly sell their shares as well).

These are points that become a lot harder to resolve once there is value in the business.

The most important element though is to have a document that reflects your agreement and how you want the company to managed and move forward.

Author Bio:

Elemental CoSec is a leading provider of UK company secretarial services and corporate legal services. If you would like assistance with drafting a UK shareholders’ agreement, please contact them directly.

Note: This article has been provided by Elemental CoSec for information purposes only and is based on UK law. Specific advice should always be obtained if you are in any doubt as to your rights or obligations. No liability is accepted in respect of this article.

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