Whether you are preparing to start a company or have already been trading through a company structure, you may have considered putting a shareholders agreement in place. This article will explain what a shareholders agreement is and discuss the right time to enter into one.
What is a Shareholders Agreement?
A shareholders agreement is a contract between the company’s shareholders and, often, the company itself. It sets out the rules of how the shareholders will operate the company.
Key clauses within a shareholders agreement will address:
- how to appoint and remove directors;
- how to make key company decisions (for example, whether decisions require a special resolution of directors or shareholders); and
- the process for how shareholders may exit the company.
Notably, there are certain rules in the Companies Act that you cannot contract out of via your constitution or shareholders agreement. However, you can override certain key provisions if you have separate governance documents, like your constitution and shareholders agreement.
For example, under the Companies Act, shareholders can freely transfer their shares. However, with a constitution and shareholders agreement in place, your company and its shareholders can place restrictions around transferring shares. Indeed, you might make it a requirement for selling shareholders to offer those shares to other shareholders first. Likewise, if none of the other shareholders wishes to buy them, the shares can be offered to a third party, provided the board first approves them.
When is the Right Time?
If you have more than one shareholder in a company, it is recommended that your business adopts a shareholders agreement. If you only have one shareholder, you will not yet be in a position where potential shareholder disputes may arise.
Depending on the nature of the relationship, a shareholders agreement for early-stage companies will usually give founder rights to initial shareholders. These founder rights often include an entrenched right to appoint a director (typically themselves). Likewise, that director or shareholder meetings cannot occur if the founders are absent.
Having such rights included from the outset can give founders certainty that they will retain control in key company decisions. This remains the case even if the company expands and additional shareholders come on board in the future. Where a shareholder disagrees with company decisions, a shareholders agreement can also prevent stalling of the company’s affairs.
Another situation is where you are the sole director and shareholder, but another shareholder is looking to come on board. In this situation, having an agreement before the shareholder comes on board allows you to set the rules for how the company will operate. You can also detail what decisions are reserved for you as a founder. Likewise, the new shareholder must approve the existing agreement and sign a deed of accession, binding them to the agreement. This may be preferable to having to negotiate the whole agreement with the new shareholder.
Continue reading this article below the formPotential Risks of Not Having a Shareholders Agreement
In the event of a dispute between shareholders, a shareholders agreement can outline dispute processes, allowing the company’s business to continue to operate. Commonly, conflicts arise when a shareholder regularly disagrees with company management and stalls company decision-making.
Additionally, a shareholder who exits a company can pose a risk to the company’s intellectual property. In particular, the exiting shareholder may be able to leave with confidential information. A shareholders agreement will typically contain protections around shareholder exists. For example, it may state that the company owns any intellectual property a shareholder creates in respect of the business.
Finally, you can include terms in your shareholders agreement that restrain an exiting shareholder from joining a business that competes with your company.
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Key Takeaways
A shareholders agreement is a contract between the shareholders of the company. It sets out the rules of how the shareholders will operate the company. It is best to put a shareholders agreement in place where there is more than one shareholder (although a sole shareholder may sometimes elect to put one in place before a shareholder comes on board). A shareholders agreement can help mitigate shareholder disputes and outline processes that govern how to proceed with as little disruption to the business as possible.
For assistance drafting a shareholders agreement and determining the right time to enter into one, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
A shareholders agreement will set out the commercial relationship between shareholders, and shareholders and directors. It can outline how decisions are made and who can make them. By detailing set processes to handle various disputes from the outset, a well-drafted shareholders agreement can result in significantly less disruption to the company.
Common shareholder disputes can range from disputes over the company’s operations, intellectual property ownership and challenging shareholders.
If you have more than one shareholder in a company, it is recommended that your business adopts a shareholders agreement. If you only have one shareholder, you will not yet be in a position where potential shareholder disputes may arise.
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