Why is a Shareholders Agreement important?

Why is a Shareholders Agreement important? image

Shareholders are bound by the company’s Articles of Association and their obligations under it. However, there is no personal obligation to the company beyond the same. A well drafted shareholders agreement creates that personal obligation, a contract between the shareholders and forms a legal relation between them. The agreement gives clear structure to the shareholder of what is required of them and details what the company expects from the shareholder.

The Shareholders Agreement details how a company will effectively be run and the role of the shareholders. This sits alongside the articles of association and under general company law. The agreement can provide bespoke clauses to fit the company’s needs in the level of detail desired. Details can include the shareholders responsibilities, any dividend policies, how shares can be transferred, rights of first refusal, how to resolve disputes and offer shareholder protections. The Agreement can also provide clear terms for when shareholder consent is required for certain decisions.

The agreement is a private document between the shareholders which allows it to be more detailed than those documents typically filed at Companies House.

A Shareholders Agreement is also a great way to address what happens if a shareholder dies or becomes incapacitated. Without an agreement in place, the deceased’s shares will pass through their estate to a spouse or family member. This may not be ideal if the recipient has no knowledge of the business or has no inclination to fulfil their obligation as shareholder. Some shareholders may not wish to pass the burden of shares onto their relatives and are looking for a way to prevent this happening. A Shareholders Agreement can provide a solution whereby, shareholders can agree to give an option for the surviving shareholders to purchase the deceased’s shares, specifying the terms of the purchase and how the shares are valued. There can be a similar mechanism where a shareholder loses capacity.

A Shareholders Agreement can also provide protection for the shareholders.  Majority shareholders may wish for protection in the event of a sale, where a third party buyer wishes to purchase all the shares in the company. The agreement could include a drag-along clause, whereby a shareholder with a stipulated percentage of shares in the company wishes to sell to a third party, has an option to force the minority shareholder to sell their shares to the third party buyer at the same time. The agreement can also favour a minority shareholder who may be looking to restrict certain shareholder decisions with a unanimous vote, overriding what would normally be a majority vote. All these points can be laid out in the shareholders agreement.

In all, a shareholders agreement can be very important in the running of a business, as not only does it provide certainty for the shareholders, but it can protect the success of the company and its business going forward.

If you would like more information on the benefits of a Shareholders Agreement or you would like to discuss how a Shareholders Agreement could benefit you, please contact Becky Hughes on 01747 854244

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