If you’re in a business partnership, you’ve likely contemplated the necessity of a shareholder agreement or assessed if your company’s articles of association offer adequate protection.
What is a Shareholder Agreement?
This is simply a contractual agreement among all or a subset of a company’s shareholders, outlining their respective rights and responsibilities concerning the company and its operations.
A well-crafted shareholder agreement will instil confidence in all parties, assuring them that both the business and their investments are safeguarded.
Is it necessary for every business to have one?
No. Not every business needs to have a shareholder agreement. It depends on the nature of your business and its needs. The Companies Act and a company’s articles of association both give some shareholder protections which can be adequate. But if you think you and your shareholders could benefit from some extra security then a shareholder agreement is your best option.
Each business and group of shareholders has a unique set of circumstances and needs.
Where the arrangements you have implemented are not customised to your business, this can cause problems if an argument happens.
If you are not certain what the optimal choice would be for you and your business, it is important to speak to a specialist solicitor who can advise you better. By doing this early on, you could be saving yourself stress later down the line.
What are the standard terms and conditions typically included?
To ensure that you have a strong shareholder agreement you should make sure that it lays out the expectations you have for the business and also considers what would happen if anything went wrong or if a shareholder wants to leave.
Commonly included provisions are:
- What the business’s purpose is
- The contributions that are expected from each shareholder to the business
- The details that each shareholder will be provided regarding the business
- How the board is made up
- The decision-making process
- Guidelines for the issuance and transfer of shares
- Description of the privileges associated with distinct share classes
- How to resolve a deadlock
- What would happen if a shareholder wanted to leave the company
- What happens if a shareholder who breaches an agreement needs to be removed from the company
- Restrictive covenants
- Clauses such as confidentiality
- Articles of Association limitations
Your articles of association will detail many of the provisions just mentioned, however, they will need to be registered at Companies House, and so are a matter of public record.
It is important to note that your articles are not appropriate for personal or confidential nature.
Issues with Shareholder Agreements
Online shareholder agreements are available online but it is crucial not to use them as they are not tailored to your business so they will not be suitable.
If a dispute arises, a generic shareholder agreement may not provide the tools needed to reach a satisfactory resolution.
We very often see cases where business partners fall out and there is no shareholder agreement in place or the existing one does not offer a sufficient plan to resolve the dispute. Similarly, one of the shareholders could not be working hard enough or they decide to leave or want to start a new business or join another one.
Where this happens, it can result in a deadlock. Deadlock is where opposing shareholders within a business are unable to reach an agreement or make a decision due to a complete standstill.
This can be devastating for a business and means that it simply cannot operate. If this happens then the only thing to do is to close the business.
If a shareholder agreement is well put together it will clearly outline each shareholder’s responsibilities and what the process would be if there is a breach, including what occurs in the event of a breach, including a process for expelling that individual from the business through a compelled sale of their shares.
Neglecting to establish clear procedures for transferring shares in the event of a shareholder‘s death or incapacity can lead to complications. It’s crucial to discuss these scenarios when drafting your shareholder agreement.
If this is missed out in the shareholder agreement a person’s will will decide who will receive the shares and this could mean that someone you do not know could potentially have a say in how you run your business.
By implementing careful planning, you can establish a mandatory sale provision supported by a life insurance policy to finance the purchase price.
If you need assistance in this area please email nick.attwell@attwells.com or call 01473 229242
Our blogs and articles are correct at the time of writing.
These have been created for marketing purposes only and should not be considered as legal advice.
