Whilst you may not legally need a Shareholders’ Agreement for your business, it is highly advised to have one if you have more than one shareholder.
Having a shareholders’ agreement is valuable to a business and can help when it comes to disputes, company management, shareholder protection and also if a deadlock occurs in decisions.
What is a Shareholders’ Agreement?
In short, a shareholders’ agreement is a document that is legally binding and sets out the company control, management and rights per shareholder. For more information on shareholders’ agreements, explore our shareholders guide.
It’s also important to remember that Articles of Association are different to a Shareholders’ Agreement.
When Is a Shareholders’ Agreement Needed?
As mentioned, no company or business legally needs a Shareholders’ Agreement, however they are valuable documents when it comes to the legalities within your company, such as share amounts and breaking deadlocks.
It’s often overlooked when a business begins as it is seen as another expense that isn’t necessary. However, this can lead to disputes down the line as relationships change within companies.
Here are some key reasons why businesses may choose a Shareholders’ Agreement:
Your Business Has Two Or More Shareholders
Having two or more shareholders is often the main reason for a Shareholders’ Agreement to be created. This is to cover the majority and minority shares, dispute resolution and deadlock procedures.
If your business has one shareholder, you do not need a shareholders agreement. It’s often overlooked when family members have a shared business that they should also have a shareholders agreement.
However, regardless of shareholder relationships, it’s still best to make use of one.
Transferring Shareholders
Transferring shareholders can be done without an agreement, but this may be messy in the future if there are no contracts or legally binding documents. If your partner in the company sells their half of the business, then the Shareholders’ Agreement will dictate rules around this. This helps to keep the business and other shareholders safe.
This is usually achieved through pre-emption rights, which give existing shareholders the first opportunity to buy shares before they are sold to someone else, based on their percentage of ownership.
Put simply, having a Shareholders’ Agreement with this procedure in place means that the process of selling shares is done fairly.
Adding New Shareholders
Directors have the ability to add new shareholders to the company, meaning shares may be changed and decreased over time. A Shareholders’ Agreement can be used to restrict this, or at least ensure that current shareholders have a say in the decision.
Selling the Company
Selling the company can be harder when there is more than one shareholder, especially when there are differing percentage shareholders.
There are parts of a Shareholders’ Agreement that protect both minority and majority shareholders, and these are called ‘drag along’ and ‘tag along’ rights.
- Drag Along Rights – Allows majority shareholders to force minority shareholders to sell if they are selling their shares.
- Tag Along Rights – Protects minority shareholders and allows them to join the sale if majority shareholders are selling.
Managing Disputes
Shareholder disputes are a possibility in all companies, which is why having a Shareholders’ Agreement can be really beneficial when it comes to handling them correctly.
People going into business together often don’t think of the costs that disputes will raise in the future, especially when it comes to family businesses. Having pre agreed rules will help when future issues crop up and will help protect all shareholders.
Deadlocks
Deadlocks can happen when disputes aren’t solved, with shareholders not seeing eye to eye. It’s important to have a deadlock resolution in place, which can be called upon when dispute management doesn’t quite solve the issue.
Contact Our Shareholders’ Agreement Solicitors for Expert Advice
Each company is different and requires a different Shareholders’ Agreement, so it’s important to consult experts who know how this document can work for you.
At Talbots Law, our Corporate & Commercial Team specialises in Shareholders’ Agreement and Articles of Association. We can review your company’s documents, help you plan for succession, and ensure your business is protected in most events including disputes and deadlocks.
Contact us today on 0800 118 1500 or get in touch online to arrange a consultation. Let us help you safeguard your company and make sure your agreements work for you when it matters most.
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Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.
This blog was written by Kamla Singh, Solicitor in our Corporate & Commercial Law team.