What is a shareholders’ agreement and why do I need one?

A shareholders’ agreement sets out the rules of the relationship between the shareholders of a company as well as the relationship between the shareholders and the company itself. It is not mandatory to have one, but there are good reasons for doing so.

A shareholders’ agreement creates clarity in relation to how issues are dealt with in practice. This helps you to protect your investment. Clarity makes your company more stable and attractive to prospective investors and lenders. If you want to protect yourself or plan to raise external investment, sorting out a shareholders’ agreement should be a priority for you. It can always be updated as your company develops, so there is no reason to wait to sort it out.

It is a private document. This means that sensitive information about how your company operates remains confidential and unavailable to third parties.

It can be difficult to resolve disagreements. That’s why it is sensible to create rules for how issues are dealt with and how disagreements are to be resolved. It is much easier to do this at the outset when everyone gets along instead of trying to create those rules after any disagreements have already occurred.

What issues does a shareholders’ agreement cover?

It can cover a range of issues and be tailored according to what is important to you.

It can give shareholders the power to make decisions in relation to certain reserved issues. The shareholders choose the issues where they want to reserve decision-making power to themselves instead of leaving that power with the company’s board of directors. Reserved issues requiring shareholders’ consent often include the allotment of new shares, major expenditure and loans. Requiring shareholders’ unanimous consent for the allotment of shares is an effective way of protecting minority shareholders against the dilution in value of their shares. Requiring unanimous consent in relation to any issue gives minority shareholders a veto right which protects their interests.

Drag-along rights can provide a majority shareholder with an exit plan where an offer is received to buy all of a company’s shares but a minority shareholder refuses to sell their shares.

Tag-along rights can provide a minority shareholder with an exit plan where an offer is received to buy only the majority of a company’s shares but the minority shareholder also wants to also accept that offer.

It is possible to make more general provisions in relation to the exit of a shareholder. Exits can occur or be desired for a number of reasons, such as a director who is also a shareholder leaving the business or a shareholder’s death or incapacity. These exits can create deadlocks in the sale of shares. By creating a mechanism for valuing shares, triggering their sale and deciding who pays the exiting shareholder, deadlocks can be avoided.

Rights to appoint and remove directors can give a shareholder a voice on the board of directors. The basis of these rights can be set out in detail according to the size of a shareholding or other criteria.

How do shareholders’ agreements and articles of association interact?

A shareholders’ agreement overlaps with a company’s articles of association. Some protections are more effective if they are included in the articles because they can be enforced against third parties and different court remedies are available. The articles, however, are not private, so choosing which document should contain certain protections depends on how important confidentiality is to you. Both documents should be considered together when they are drafted to avoid any conflicting provisions.

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