Shareholders agreements are one of the most important documents for a company. These agreements regulate the power between shareholders, detailing their rights and obligations to each other and to the company itself.
Not only do they clarify who makes what decisions, they also act as a record of agreement, so that should disputes arise between shareholders, the agreement can be used to settle these disputes without wasting precious company time and resources. It is always best to create a shareholders agreement as early as possible, so that potential future problems can be discussed and dealt with in the agreement.
What should shareholders agreements typically include?
This next section will look at some of the main issues covered in a shareholder agreement, and also the steps to consider in order to ensure you have a fully-functioning, practical agreement.
Examples of issues that need consideration include :-
- The transferring of shares – shares can be passed on unintentionally (e.g. on a member’s bankruptcy/death), and so the shareholders need to be prepared for this and to some extent, control who the shares pass to and what role the new member will play in the company.
- Shareholder approval for business decisions – the agreement should also consider how to deal with shareholders who are also directors, for example, do they get paid for both roles? Can they also control the payment of dividends?
- Exit and sale of shares – making provisions for specific alternative events, for example, what will happen if the company is sold, the procedure for when funding from outside parties is sought or what will happen if the business sells off its assets and then undergoes the winding up process. Provision may also be made to restrict the leaving shareholder from setting up a business in competition with the other business.
- Specific possible protections for minority shareholders – such as enhanced voting rights to veto certain issues. Generally speaking, one share equals one vote. Shareholders who have more than 50% of all the shares in the company will be able to effectively control the company (although some decisions may require 75% of the total shares to be approved which generally, in the absence of agreement otherwise gives total control such as the ability to change the internal rules of the company).
Other good reasons to have shareholders agreements in place:-
- Funding – whether in the form of a loan perhaps from a bank or investment from an additional investor as the company grows, the shareholders and the company will be far more credible if a shareholders agreement is already in place. If there isn’t shareholder agreement this may cast doubt on the business acumen of the current shareholders since it is very shortsighted to not have an agreement and may indicate a lack of clear thinking or a cavalier attitude to risk.
- Clarifying the day to day responsibilities of each shareholder – this is especially the case in a very small company where the shareholders may also be directors and work full time for the company. In the absence of employment contracts, shareholders will want to have some form of contract whereby other founding shareholders agree to turn up and work and to clarify who will be responsible for doing what.
- Privacy – a shareholders agreements are not registrable at Companies House. As an alternative to a shareholders agreement, many of the same internal rules and restrictions may be otherwise incorporate in changes to the Company’s Articles of Association. However, the articles must be registered as a public document at Companies House and can therefore be analysed by any 3rd party who may seek to take advantage of knowledge of the company’s internal rules.