Shareholders Agreement

What is a Shareholders Agreement?

A Shareholders Agreement is a document which every company with more than one shareholder should have. It contains the rules by which the ownership of a company is held and in general terms:

* provides a basis for the resolution of disputes

* confirms the powers of the shareholders in the company

* prevents the situation where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company

* sets out the limits and procedures for how the company is to be operated

Whilst it doesn't replace the Memorandum and Aricles of Association, a Shareholders Agreement could be of crucial importance in any company where there is more than one shareholder. This may be even more significant where shareholders are also family members. The agreement is there to ensure that decisions are taken by consensus and discussion rather than unilateral imposition. It will provide clarity and certainty as to what can or cannot be done, resulting in a reduction of the areas in which there might be conflict.

Why have a Shareholders Agreement?

By having an Agreement the situation where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company is prevented.

It also provides a level of protection for all of the parties involved in the ownership of the company against the actions of the others.

Typically shareholders rely on common sense and tolerance of others to resolve matters; they may well be family members or long-term friends. In either situation anything that can be done to reduce the possibility of conflict is a good thing.

It is common for a newly formed company to be run in the initial stages more like a Partnership. This however is not a suitable basis on which to continue operation as it grows and matures; there is a need for structure and a Shareholder Agreement is one of the cornerstones of the company.

While there is a lot to consider when starting a new company, it is prudent to take a longer-term view for the future. The mere formation of a company is relatively simple to achieve and allows one to start trading, it does not however confirm what responsibilities and more particularly the limits of responsibilities of the shareholders (owners) are.

However, for the four questions below a Shareholders Agreement will remove and resolve potentially damaging issues:

(1) What happens if shareholders fall out?

Common sense and tolerance may not be enough to end a dispute and specific agreed actions are called for. An Agreement will force an end to a dispute, by providing a structure within which the parties have to abide, in the event of a stalemate situation being reached, then a Shareholders Agreement will provide a dissolution procedure to allow the parties to go their own ways.

(2) What happens if a majority shareholder dies or is divorced?

The spouse of the shareholder may take his/her place. Is this what the other shareholders want? An Agreement will provide a mechanism by which the other shareholders have first right of refusal to purchase the deceased’s shares.

In the case of a shareholder getting divorced, would they wish to be joined for board meetings by a former spouse who may well be hostile? An Agreement can prevent this.

(3) Can you sell your shares to anyone?

Without an Agreement you may ­ this may not be in the best interests of the company. A common provision is a right of first refusal. This means that if a shareholder obtains a commitment from an outsider to purchase shares, the shares have to be offered under the same terms to the existing shareholders for a specified period. If the other shareholders do not want shares to go to the outsider, they merely have to match the price and purchase.

This will ensure that the on-going shareholders cannot have an un-welcome partner foisted upon them, to their detriment.

(4) Are any financial limits set?

Without a formal Shareholder Agreement, it is possible for your fellow shareholders to agree a contract on behalf of the company no matter what the terms. With an Agreement in place this cannot happen or it will not be binding on the company as the person in question will have exceeded their responsibilities.

Having control on an individual’s ability to acquire commitments on behalf of a company is of paramount importance, to ensure the smooth and profitable running of the company.

To proceed

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