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What to include in a shareholders' agreement

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What is a shareholders’ agreement?

A shareholder agreement is an agreement entered into by all or some of the shareholders of a company that outlines how it is managed, the ownership of the shares and the protection and rights of the shareholders.

Why do you need a shareholders’ agreement?

Although not a legal requirement, without a shareholders’ agreement, any disputes between the shareholders and/or directors of a company would have to be settled using the articles of association. A company’s articles of association lay out the basic rules of how the company will be run, including things such as the rights of shareholders and the process for appointing directors. This is one of two documents that all companies must legally have under the Companies Act 2006 when registering a new company. These are often written in a standard way and do not necessarily suit all companies.

Although the articles of association and a shareholders’ agreement are very similar in nature, and their contents will quite often overlap, the shareholders’ agreement is a confidential document, whereas the articles of association are open for the public to view at Company House. This may affect the decision about what is included in the articles of association and what should be kept private in the shareholders’ agreement.

It is important, therefore, to make sure that these two documents cover all the most essential points of running the business such as each shareholder’s rights and obligations. This can give the directors and shareholders peace of mind and security that their rights would be upheld should there be a dispute.

Companies are subject to many default laws concerning their governance. A shareholders agreement can be used to vary these default rules, where this is appropriate.

In some circumstances a lender may require a shareholder’s agreement as a pre-condition for raising finance.

A shareholder’s agreement can protect the rights of minority shareholders. It can also ensure there is a process in place to protect the company where there is a change in the circumstances of one of the shareholders. This can be particularly important if the company relies particularly on the actions of one shareholder or director.

Things to include in a shareholders’ agreement

There are shareholders’ agreement templates available online, that are fairly inexpensive, but it is wise to avoid these as they will not have been prepared specifically for your company and its shareholders. This means the agreement will not have been tailored to your particular needs, so could fail to take account of specific issues you are likely to face, causing the potential for problems that could have been avoided. It is always advisable to get a legal professional to draw up a bespoke agreement for you, that way you can ensure that you have covered all bases.

The main things to consider including in a shareholders’ agreement are:

  • The nature of the company and its purpose
  • The process for appointing a director
  • How decisions about the company will be made
  • How disputes will be resolved
  • The shareholders’ rights to information
  • How shares will be distributed and sold
  • Any restraint provisions on shareholders

These are some of the key points to include, but depending on the nature of a company, extra details may need to be added. This can affect the cost and time it takes to draft the document, particularly if certain points need to be negotiated. A solicitor can help you to decide what to include in your articles of association and your shareholders’ agreement, giving you the legal framework to effectively run your company and keep you and the other shareholders protected.

At Bird and Co, we aim to take the headache out of running a business, by offering a quality and affordable service for any enterprise, large or small.

If you need legal advice on a business matter, call one of our commercial lawyers today on 01476 372037 or use the simple enquiry form on the right of this page.