Firstly, what is a shareholders’ agreement? Much like the Articles of Association, a company’s shareholders’ agreement will set out and describe the way in which the company will be operated. However, unlike Articles of Association, it is a private, confidential document that does not need to be filed at Companies House. Some common inclusions are:
- The details of the rights and responsibilities of majority and minor shareholders
- The running of the company
- The types of shares issued
- The rules relating to the sale and purchase of shares
- Information regarding the payment of dividends
- Protection for minority shareholders
- Information about dilution rights
- Intellectual property assignment policies and procedures
- Confidentiality clauses
- A dispute resolution process
These can be found in the many templates made available online, however, as this is a legally binding contract between the shareholders it would be prudent to consider having a solicitor with relevant knowledge to draft a more tailored document. This way the agreement will better reflect the company, its place in the market and its goals moving forward.
What would be the risks of not having a shareholders’ agreement? In business, there is always the chance that disagreements between shareholders will occur. These could be in regard to dividends, voting or the future of the company to name a few. A shareholders’ agreement can help resolve or even avoid these issues as many causes for disagreement have already been discussed and agreed upon. An effective dispute resolution system can also be included to account for other disagreements that might arise later on.
However, these are not the only risks, there is also the potential for many other issues to arise such as:
- There is little to prevent shareholders from using or leaking confidential information
- Shareholders who are also employees can retain their shares after they resign or are dismissed
- With no agreement governing the sale of shares, existing shareholders can transfer their shares to anyone unless prohibited from doing so by the Articles
- Minority shareholders must rely on statutory rights which can be difficult to enforce. They can also block the sale of the company
- Deadlock situations can result in the company having to be wound up
- Shareholders may not have a clear exit strategy if they want to leave the company
While it is easy to believe you could have an efficient business structure without a shareholders’ agreement, many of us have now been reminded that unexpected situations or problems can arise at any time. Resolving such issues can take much time and resources. Having a well-structured shareholders’ agreement is one of the ways a business can keep running smoothly even when encountering these unforeseen issues. It is a worthy investment that can prevent future hassle, stress, and expenses.
When starting a new business as a limited liability company it is important to consider the future of the business, if you intend for your business to grow it will very likely mean the inclusion of further shareholders, directors, and employees. There is always the possibility of these roles intermingling as a business expands. Having clear guidelines, rights, and rules in the form of a shareholders’ agreement can make that growth easier to manage and maintain. It is also a great way to manage your business in general terms and show potential investors that your company is well-managed and has an efficient structure.
If you would like to draft a shareholders’ agreement for our own business then call us today, on 0121 268 3208 or send us an email at firstname.lastname@example.org with your query and we will get back to you.