Any company with more than one shareholder can benefit from a shareholders’ agreement. They can help save time, maximise investment opportunity and keep working relationships civil and productive. But what do you know about shareholder agreements?
We cover some of the more frequently asked questions about shareholders’ agreements and why they can save your business time and money.
What is a shareholders’ agreement?
A shareholders’ agreement is a document that shareholders sign to say they have agreed upon the contents. Usually they are signed by all shareholders, but there are circumstances where an agreement may only need to be signed by certain shareholders. It is a confidential document, unlike your company’s articles.
A shareholders’ agreement will normally include details on decision making, such as who can make what types of decisions and which decisions need to be authorised by all shareholders. It may also contain key aspects of the business administration, including regularity of meetings and appointment of directors.
Why do I need a shareholders’ agreement?
You normally start a company with people you trust, and it can be easy to assume that you will never experience problems. However, the business world is unpredictable and ever-changing, and the unexpected can be around any corner.
Having a shareholders’ agreement in place helps provide some stability and ensure situations are dealt with fairly and consistently.
Should relationships break down, such as in the case of disagreements between fellow shareholders, a shareholders’ agreement will normally contain clear steps to follow regarding dispute management. If a shareholder decides to sell their shares or transfer them to another member of the company, the shareholders’ agreement would normally have in place what process to follow to ensure everyone is treated fairly. The agreement provides a safeguard and protection from unexpected scenarios.
Does a shareholders agreement protect minority shareholders?
Minority shareholders hold less than 50% of the shares in a company. It can often be assumed that these shareholders hold very little control over the company – by themselves, at least. This is not an issue when all shareholders agree over the running of the company. However, when disagreements inevitably occur, minority shareholders can find themselves unhappily overruled in certain instances.
A shareholders’ agreement is a binding document that can include a requirement for all shareholders to be involved with or provide approval for business decisions. It can even be limited to certain decisions that are considered more important than others. This could include choosing who is the director of the company and how this is changed, financial decisions including borrowing, or even dealing with a total change in direction of the business.
How does a shareholders’ agreement help majority shareholders?
Despite having ultimately more control, majority shareholders can still be held up during certain processes by minority shareholders who aren’t happy with proceedings. A good example of how this can be prevented is the ‘Drag Along’ provision. Majority shareholders who want to sell the company may be held back by minority shareholders who disagree. The ‘Drag Along’ provision in a shareholders’ agreement compels the minority shareholder to sell, thus stopping this dispute in its tracks.
The shareholders’ agreement can also have in place clear rules or restrictions about the transfer of shares. This might prevent minority shareholders from transferring their shares to someone whom a majority shareholder does not think is a good fit for the company.
Shareholders with equal shares
When shareholders hold equal parts of a company, in theory, they hold equal power. But when disagreements happen, it can mean a total stalemate when trying to resolve the situation.
A shareholders’ agreement can have a clear process laid out for dealing with disputes. This helps keep the business running, as disputes are resolved more quickly, and with less need to resort to legal action. This also means that dealing with this sort of dispute is potentially less costly as well as less time-consuming.
What clauses should a shareholders’ agreement include?
The points illustrated above regarding different types of shareholders are normally included in any shareholders’ agreement. But the contents of a shareholders’ agreement very much depend on the requirements of the company and the number of shareholders. Here are some of the key things you could consider including in a shareholders’ agreement:
- Procedures for dealing with disputes
- Tag along and drag along provisions
- Rules on paying dividends
- Issuing shares
- Transferring shares and restricting who they are transferred to
- Decision making, in particular protecting minority shareholders
- How often the board meets
- Guarantees and indemnities
This is not an exhaustive list by any means. Your shareholders’ agreement will be unique to your company and your shareholders.
When should a shareholders’ agreement be put in place?
The best time to draw up a shareholders’ agreement is when the company is formed, or soon after. Hopefully, at this formative stage, shareholders should be aligned in where they see the company going and what their goals are. This will help in creating a document all shareholders agree on and are happy to sign. If, at this early stage, it is too difficult to form a shareholders’ agreement without disputes forming, this could be a sign that not all parties are as invested in the project as they initially seemed.
If a shareholders’ agreement is not set up immediately it should be done soon after to ensure the safeguarding of all parties and their interests. It can even be a positive experience; a chance for the shareholders to cement their ideas and expectations and get excited about the future of their new business.
There is no legal requirement to have a shareholders’ agreement, and there are no points that ‘must’ be included. But it’s clear that having this agreement in place benefits all shareholders and can ultimately improve the running of your business. It provides stability and takes away uncertainty, and ensures that disputes are dealt with swiftly and consistently. A shareholders’ agreement is the best way to ensure that everyone invested in the company feels like they are being treated fairly, and this is the best way to keep your business moving forward.
When it comes to advising on and drafting shareholders’ agreements, we can advise on the most effective strategy for your business.
If you would like to learn more about Shareholders’ Agreements, please see the Insights Article on the subject of shareholders’ agreements.