Why do I need a Shareholder’s Agreement?

Why do I need a Shareholder’s Agreement?

A shareholders’ agreement (SHA) is a document that helps regulate the relationship between the shareholders and the company. While articles of association (the “Articles”) are legally required on the incorporation of a company and must be filed publicly with Companies House, a shareholders’ agreement is a private contract that remains confidential. It is not mandatory by law, but having one can offer several advantages.

A “founder shareholders’ agreement,” created early in a company’s life cycle, can clarify expectations and reduce potential disputes. It defines governance structures, roles, responsibilities, share vesting, founder commitment, restrictions on founders’ activities, and procedures for share transfers or future financing. These early agreements establish a clear framework for founders, which is helpful when negotiating terms with external investors during later funding rounds.

In addition, an SHA offers a more straightforward way for shareholders to enforce their rights. Breaching a SHA allows an individual to file a claim for breach of contract and possibly seek damages. On the other hand, claims under the Articles are more complex and often need to be brought in the company’s name.

An SHA is also advantageous because certain provisions that may not be included in the Articles due to restrictions under the Companies Act 2006 can be included in the agreement. This makes the SHA a flexible tool to ensure that important governance issues are clearly communicated and enforceable.

As a company grows and attracts external investors, a more detailed and comprehensive shareholders’ or investment agreement is usually required. While these later agreements will include more complex provisions, having an initial SHA will help founders understand the key elements and prepare for negotiations with future investors.

However, founders should be cautious not to agree to overly restrictive terms or concede too much in early-stage agreements. It’s advisable to seek legal advice to ensure the agreement is balanced and does not hinder future growth.

If you are being asked to sign a shareholders agreement and need advice or would like to draft a shareholders agreement then please contact Nick Attwell at Attwells on 01473 229242 or email Nick at [email protected]

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