subject: Shareholders Agreement: Do you need one? [print this page] Author: James Quinn Author: James Quinn
A Shareholders Agreement is simply a contract made between the shareholders of a company. It governs the relationship between the shareholders, and between the shareholders and the company.
It is important to note that there is no legal requirement to enter into a shareholders agreement. Also, if shareholders do decide to enter into such an agreement, there are no legal requirements as to its contents. These agreements are entered into voluntarily by the shareholders to provide certainty, to resolve conflict and to protect their investment in the company. How do they work? The relationship between the shareholders of a company is governed by the applicable law and the Articles of Association of the company in which the shares are held (referred to in this article as the applicable law). The Companies Act 2006 is the key legislation in this area. The applicable law establishes the default relationship between the shareholders, and their relationship with the company. In the absence of a supplementary contract, the applicable law will define those relationships. The purpose of a shareholders agreement is to amend the default relationship established by the applicable law. For example, by providing minority holders with additional rights, by inserting restrictions and procedures relating to the transfer of shares, or by controlling companys the finances. It is important to note that there are certain aspects of the default relationship which can be amended by entering into an agreement, and that certain other aspects cannot. Great care is required when drafting such an agreement to ensure that the amendments to the relationship do not infringe the applicable law. Do I need one? As stated above, there is no legal requirement to enter into a shareholders agreement. However, altering the default legal relationship between the shareholders and the company, and adding relevant additional provisions, can be invaluable in protecting your investment in the business. Entering into such an agreement can also avoid conflict between the parties, as well as helping to resolve any conflicts which do arise. The benefit derived from entering into such an agreement does of course depend on your circumstances and the nature of the business in which you have invested. Some of the key benefits can be as follows: - Controlling the ownership of the shares by imposing restrictions on the transfer of shares and/or mandating transfers in specific circumstances. For example in the case of death, mental illness or bankruptcy.
- Establishing procedures to resolve conflicts.
- Providing additional protection to minority holders (i.e. those owning less than 50% of the share capital).
- Regulating the appointment and removal of directors, and their terms of employment.
- Setting out how the company is going to be financed.
- Setting out clear rules regarding the payment or dividends and other benefits, including salary and directors fees.
- Imposing restrictions competing with the company.
- Preventing shareholders from poaching customers or staff. When should I enter into a Shareholders Agreement? If the shareholders of a company choose to enter into a shareholders agreement, they do not have to do so prior to forming their company, or immediately after the company is formed. It can be entered into at any time. However, bear in mind that the benefits of entering into such an agreement are obviously only available once it has been entered into. For example, if a shareholder transfers their shares, or a conflict arises, before an agreement has been entered into, then it is likely to be too late to negotiate the terms of that agreement. With this in mind, if the shareholders of a company choose to enter into a shareholders agreement, it is advisable that they do so at the same time as the company is incorporated, or as soon as possible thereafter. Disclaimer: The information provided on this article is intended as a general guide only. It is not exhaustive or tailored to your individual circumstances. Please contact Legal Clarity if you require specific advice or for further information. About the Author:
