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Shareholder Agreement . . . why do you need one?

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Many shareholders overlook the need for a shareholders agreement . . . until they experience problems and it becomes a case of who said what, and who remembers what was said.

When setting up a new business, very few business owners think about the possibility of differences and disputes arising with other shareholders in the future.  Not only that, but everyone believes that they have an excellent memory and won’t forget what has been agreed, and by whom, even if it’s not written down.

Unfortunately, the reality is a little different, and without a shareholder’s agreement, things can turn ugly very quickly.

So, what difference does a shareholder agreement make?  Muneeb Dean, Talbots Law’s Director & Head of Company Commercial, gives 10 compelling reasons for partners in any new business venture to make sure they protect themselves and each other against argument in the future.

A shareholder agreement is a contract drawn up to determine shareholders’ rights, responsibilities, restrictions, privileges and protections.  The agreement provides guidelines for the running of the company and can set boundaries.  Additionally it is a document which can be referred to for guidance. The agreement only binds those who sign it so it does not have to bind all of the shareholders. 

Here are 10 excellent reasons for a shareholder agreement:

  1. It’s a private agreement which, unlike the articles of association, doesn’t have to be filed at Companies House
  2. It provides enhanced rights which you might not automatically get as a shareholder, eg the ability to appoint a director
  3. Provides exit strategy which can help you plan how you can sell
  4. Can combine with cross options – if a shareholder should die, it can allow an insurance policy to trigger a payment
  5. Provides “fair solutions
  6. Drag rights if majority want to sell – if you find a buyer you can force a minority shareholder to sell
  7. Deadlock procedure – if there are an equal number of votes, you can have a mechanism to move forward
  8. Binds future shareholders
  9. Protects minority shareholders – it can provide a minority shareholder with protection against a majority shareholder
  10. Save money/pre-nup – shareholder agreements are often described as pre-nups for businesses, and if drafted well can save money in the long term.

What if a dispute can’t be resolved, even with mediation?  Then the last resort is to wind up the company.   A shareholder can petition for a winding up order where:

• a minority shareholder was wrongly excluded from management;

• majority shareholders have consistently ignored the rights of the minority;

• directors have awarded themselves excessive remuneration whilst refusing to pay dividends to shareholders;

• deadlock within the company preventing decisions being made.

For more information about shareholder agreements contact Muneeb DeanFor help with a dispute, please contact Jagdip Bains.

Our Business Services Team is always on hand to help you and your business on a wide range of legal issues, including commercial property (buying, selling, leasing), employment legislation, disputes, contracts, agreements, terms & conditions – just call us on 0800 118 1500 to find out how we can help you today.