8 reasons why you should have a shareholders’ agreement

8 REASONS WHY YOU SHOULD HAVE A SHAREHOLDERS’ AGREEMENT

Whether you have a number of employees or are simply running a company with your co-founders, having a Shareholders’ Agreement in place can prevent potential complications further down the line.

A Shareholders’ Agreement is not a legal requirement but it forces the parties to think about potential areas for concern which may not have been previously considered. So, what are the benefits of a Shareholders’ Agreement and why should shareholders have one?

1. Fallouts and disagreements

When setting up a new business, it is difficult to envisage future disagreements where the shareholders fall out over important decisions. A Shareholders’ Agreement is a key antidote in preparing for any big or small disagreement and can contain provisions which explain exactly what should happen if the shareholders are unable to reach an agreement or end up in a deadlock situation.

2. Business strategy

A Shareholders’ Agreement is a useful way to document the intentions of the shareholders and how the company should be run and in which direction the shareholders intend to take the business in the long term. As a result, the company’s strategy is clear in the minds of all members from the outset and can be easily referred to at any given time.

3. Limit director control

Many decisions relating to the day-to-day running of a business are left to directors. But it may be appropriate for shareholders make certain important decisions, particularly those which will have a big impact on the company. A Shareholders’ Agreement can clearly stipulate which decisions also require shareholder approval. This is particularly important in companies where not all shareholders are directors.

4. Alternative dispute resolution

Often, when the shareholders cannot resolve a dispute between themselves, the matter will be referred to a solicitor or other professional. Getting legal advice can be expensive and time-consuming and could ultimately lead to extreme measures, such as the company having to be dissolved. One way to avoid this is to have a procedure for mediation or arbitration. A Shareholders’ Agreement can contain a provision which details when a dispute should be escalated and who the mediator or arbitrator should be.

5. Protect minority shareholders

A Shareholders’ Agreement can protect minority shareholders by stipulating that some decisions, for example varying the articles of association or issuing more shares, require unanimous consent. The shareholders may also wish to include ‘tag along’ provisions, which allows the minority shareholders to ‘tag on’ to a majority shareholder in a share sale situation.

6. Protect majority shareholders

‘Drag along’ provisions in a Shareholders’ Agreement protect majority shareholders where a third party seeks to acquire the entire shareholding in the company. In this case, majority shareholders can ‘drag along’, or force, minority shareholders to also sell their shares. This means that majority shareholders are not ‘stuck’ in the company should they want to leave.

7. Restrictions

Shareholders may wish to include restrictions where a departing shareholder is restricted from setting up a competing business or seek employment with a competitor company. Such restrictions are often stricter and more onerous than those usually found in employment contracts and, as a result, can act as an effective deterrent.

8. Keep shares within the company

If one shareholder wants to sell their shares, the remaining shareholders may want to ensure they have first right of refusal over those shares. This is often referred to as a ‘pre-emption right’, which prevents shares from being offered to external investors and limits the ownership of shares to existing members of the company.

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