A shareholder is any person(s) who own at least one share of a company.
A shareholders’ agreement, therefore, is a document outlining the legal agreements made between the shareholders of a company, regarding their rights and obligations as shareholders.
This agreement is a private contract and can be kept confidential. This differs from the companies ‘articles of association’, which are public.
The ‘articles of association’ will only go so far in protecting the shareholders/director(s) of a company, it is necessary to draw up both.
The shareholders’ agreement also provides more flexibility regarding how shareholders regulate their business relationships, more so than the articles of association do.
Furthermore, where family members or friends are shareholders in your business, it’s wise to have an agreement in place in case of a change in circumstances which puts pressure on working relationships.
Putting time and consideration into this agreement, provides everyone with the assurance that their share(s) will be protected in these instances, and that there is a pre-thought method of dealing with a difficult situation, should it arise.
There will be costs incurred in drawing up a shareholders’ agreement, but it can lead to significant savings in the long run. Without an agreement, it could mean the company ceases trading as the result of a dispute leading to the loss of investments.
Below is a list of key areas that many shareholder’s agreements cover:
- Equity investments and the financing of the company
- Details of the business- and how it will be run
- How decisions will be made/any critical decisions that require special consents
- ‘Dispute resolution provisions’ – what to do if the shareholders fall out
- The appointment and removal of company directors
- Exit provisions: How shareholders will release their investment, (often they will need to offer their shares to other shareholders first.)
- Provisions to protect the interests of the company, including non-compete provisions and non-solicit provisions (so that a shareholder cannot open a competing business or take forward contacts of suppliers/customers – if they move on)
- Share transfer provisions/restrictions, (by law any shareholder can transfer shares freely unless there is a clause in the agreement that states otherwise).
- Information rights for the shareholders (including the right to see minutes of the share-holders meetings/the right to vote on decisions or send someone in their place etc.)
Unless you are the sole shareholder of a company, you should always consider entering into an appropriate shareholders’ agreement and, potentially, a set of articles tailored to the provisions of the shareholders’ agreement