What is a Shareholder Agreement?

Simply put, a Shareholder Agreement is a document that every company with more than one shareholder should have. It contains the rules by which the shareholders agree to operate the company and in general terms provides the basis of a legal agreement between them.

A Shareholder Agreement is there to ensure that decisions are taken by consensus and discussion rather than unilateral imposition, or indeed quite the opposite if that is what has been agreed. It will provide clarity and certainty as to what can or cannot be done, resulting in a reduction of the areas where there might be conflict, and most importantly provides a framework for dispute resolution, exit strategy for disaffected shareholders, and resolution of shareholdings in circumstances such as divorce or death of other shareholders. All these factors can cause untold difficulties if the shareholders do not make sufficient provision.

Key Points:

  • Determines the basis for important decision making
  • Defines a procedure for the resolution of disputes
  • Confirms the powers of the shareholders in the company individually or communally
  • Prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company
  • Sets out the limits and procedures for how the company is to be operated
  • Provides a framework for exit strategies for the shareholders
  • Safeguards each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death of a shareholder

Why have a Shareholder Agreement?

Whilst it doesn't replace the Articles of Association, and there is no legal requirement to have a formal Shareholder Agreement, it could be, and often is of crucial importance in many companies where there is more than one shareholder. This may be even more significant where shareholders are also family members as the statistic for the ever-increasing divorce rate indicates!

A Shareholder Agreement provides a level of protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

Shareholders typically rely on common sense and the tolerance of others to resolve matters; they may well be married, family members or long-term friends. In either situation anything that can be done to reduce the possibility of conflict is a good thing and whilst these matters are usually very far from the thoughts of business partners starting out in new venture, just like a marriage, things do not always work out as expected.

A formal agreement prevents an impassable obstacle if things go wrong in the future. It is common for a newly formed company to be run in the initial stages more like a Partnership. This however is not a suitable basis upon which to continue to operate as it grows and matures. There is a need for structure and a Shareholders' Agreement is one of the cornerstones of the company structure.

While there is a lot to consider when starting a new company, it is prudent to take a longer-term view for the future. The mere formation of a company is relatively simple to achieve and allows a business to start trading. It does not, however, define responsibilities and more particularly the limits of responsibilities of the shareholders.

A Shareholder Agreement will remove and resolve some common potentially damaging issues as follows:

(1) What happens if shareholders fall out?

Common sense and tolerance may not be enough to end a dispute where a specific action is called for. A Shareholder Agreement will force an end to a dispute, by providing a structure within which the parties have to abide. In the event of a stalemate situation a Shareholder Agreement will provide a procedure to allow the parties to go their own ways.

(2) What happens if a majority shareholder dies or is divorced?

The spouse of the shareholder may take his/her place. Is this what the other shareholders want? A Shareholder Agreement will provide a mechanism by which the other shareholders have first right of refusal to purchase the deceased’s shares. In the case of a shareholder getting divorced, would they wish to be joined for board meetings by a former spouse who may well be hostile? An Agreement can prevent this.

(3) Can you sell your shares to anyone?

Without a Shareholder Agreement you may be able to. This may not be in the best interests of the company. A common provision is a right of first refusal. This means that if a shareholder obtains a commitment from an outsider to purchase shares, the shares have to be offered under the same terms to the existing shareholders for a specified period. If the other shareholders do not want shares to go to the outsider, they merely have to match the price and purchase. This will ensure that the on-going shareholders cannot have an unwelcome partner forced upon them to their detriment.

Whilst most new companies now have pre-emption rights built into their Articles of Association, the terms written into a Shareholder Agreement may be far more detailed and specific to particular individuals.

(4) Are any financial limits set?

Without a formal Shareholder Agreement, it may be possible for your fellow shareholders to agree contracts on behalf of the company no matter what the terms. With an Agreement in place this cannot happen or it will not be binding on the company, as the person in question will have exceeded their responsibilities.

Having control of an individual’s ability to make a commitment on behalf of a company is of paramount importance in order to ensure the smooth and profitable running of the company.

How do I proceed?

We have service two options available:

Standard: We will send you a detailed shareholder agreement document with spaces for you to enter your specific details. Full instructions are included that guide you through the process. This is a quick and cost effective option and covers all the standard issues that are likely to cause problems in the future.

Bespoke: Our Standard option gives a low cost facility to put a general shareholder agreement in place and is suitable for many circumstances where there is a simple shareholder structure, for example a married couple. However, if you have a specific need to add detailed scenarios or particular requirements to tailor your agreement, our Bespoke option is the one to choose. This option allows for a degree of tailoring of your agreement to suit your particular needs.

Click the "place order now" button to take you to our secure online ordering page. Once your order has been received and processed, you will receive your template document by post, or in the case of a bespoke document, a short questionnaire by email for you to complete. The questionnaire allows us to gather all the information we need in order to tailor your Shareholders' Agreement correctly. Please complete and submit the form online or print it out and return to us by post.


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