Why do you need a shareholders agreement?

Why do you need a shareholders agreement? image

In an ideal world everyone in business would get along. There would be no disagreements between owners and everyone involved would have the same vision for the future of the company. Unfortunately, we do not live in an ideal world. That is why a shareholders agreement is essential for companies with multiple shareholders. It could save all shareholders in a company time and money by avoiding legal disputes, especially when directors/shareholders fall out. It can also keep directors/shareholders from trying to take the company forward in different ways.

A shareholders agreement does not have to be complicated, and in its simplest form is a legally binding agreement between two or more shareholders in a business. Such an agreement can set out how the business is run, for example:

  • how the company is financed;
  • how major decisions are made;
  • voting rights of each shareholder;
  • how additional shares are to be allocated; and
  • how dividends are to be paid.

As well as, what should happen in the event that directors/shareholders fall out, or leave the company due to illness, retirement or death, i.e.:

  • what happens if shareholders do not agree;
  • how shareholders can leave the company; and
  • how shares should be valued in the event of shareholdings needing to change.

Whilst the company’s constitution (known as the Articles of Association) is designed to outline how a company operates, a shareholders agreement sets out the obligations, responsibilities and expectations for shareholders, to the company and to each other. It can also provide a contractual remedy when things go wrong and help avoid costly litigation. Shareholders agreements tend to acknowledge and protect the interests of both minority and majority shareholders alike.

You worked hard to grow your company. By putting a shareholders agreement in place, you are safeguarding your company and protecting your interests, and those of the other shareholders.

At Farnfields we assist all sorts of companies of different sizes and nature with their shareholders agreements. If you would like to discuss a shareholders agreement for your company, please contact a member of the Commercial team at Farnfields on 01747 854244. We would be pleased to assist.

Pictured: Jenny Legg, Senior Associate Solicitor.


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