What is a shareholders agreement?

What is it?

As the name implies, this is an agreement between the shareholders of a company. It sets out the relationship between shareholders and how the company should be run to a certain degree. The Shareholders Agreement should work in tandem with the company’s Articles of Association.

Do I need one?

No, not if you are the only shareholder in your company. At a later date, if you want to bring in investors or form a new partnership then you can always make a Shareholders Agreement at that point.

If you have more than one shareholder, or intent to have more than one after your incorporation, it is highly advisable to have an agreement in place. The agreement create certainty within a company and helps to avoid disputes and the costly litigation that can follow.

What about if I’m starting up with friends?

At the moment you may be able to reach an agreement quickly with your friends on business matters, but in the future it might not be so smooth. What if with the revenue from your latest completed assignment, you think the company should invest in upgrading your vehicle(s) but one of your partners thinks that the money should be used for advertising and the other partner thinks that the money should be used for staff bonuses. Maybe you can talk them around to see things your way, but how inefficient is this when you have your core business to be getting on with. It also doesn’t take into account the opinions and expertise of others in your company such as any investors or analysts that you might have. A Shareholders Agreement will include a method for resolving differences in opinion, this process should involve all the relevant people and ensure that a suitable decision is made. Without a shareholders agreement, one of your other directors could just go right ahead and use the company’s money for advertising or staff bonuses potentially without telling you.

Roadblock to financial support

If you don’t have any shareholders at the moment but are looking to attract some, or looking to gain financial support from a bank, one of the first questions you will face is ‘can I take a look at your company’s Shareholders Agreement?’ Anyone considering putting money into your company is going to want to some assurances that their money will be used in a sensible way and not just frittered away. Investors will also want to be sure that the company is being properly led and is working towards making a profit. Your company being profitable is the only way investors make a return on their money.

Dismissing dishonesty

So imagine that you have started a company with someone who turns out to be dishonest. Someone who has used company money for something other than company business. It is very hard to work with someone who you don’t trust. What do you do?

You started the company together, you don’t have the power to sack them. Even if you manage to convince them to leave the company you can’t force them to relinquish their shares. If you carry on the company you will have to pay this person a dividend from your profits every year.
If you have a clause in your Shareholders Agreement however, you would be able to force a dishonest person out of your company. This would prevent the need for you to wind up the old company and start a new one from scratch.

There are dozens of scenarios where disputes can arise between directors and major shareholders. If you don’t have a legally binding agreement in place, you could be faced with having to part company with the business you have worked so hard to build up, needing to start all over again going it alone or with new partners.

Is there a standard Shareholders Agreement I can use?

No, there is no such thing. Company Shareholder Agreements, by their very nature, are bespoke. Any form of a ‘standard agreement’ will not cater to all of your company’s needs and likely contain a lot of irrelevant information, clauses and stipulations. This can lead to loopholes and voids in contracts and when you come to consult the agreement to resolve a dispute, it may not be adequate for the intended purpose. Shareholders Agreements do often contain standard clauses however. It is very common to see the following for example:

• Restrictions on the transfer of shares. This is often in the form of a rule that means that before any Shares are moved about, all existing shareholders have to agree to it. This enables you to keep control over who has an interest in your company.
• Requirements for consent to be obtained from all shareholders (or all key shareholders in some cases) before any major purchase or other decision is reached. This can the prevent the situation we talked about earlier where a partner could go ahead and make a purchase large purchase that you didn’t know about or agree to.
• A restriction on shareholders acting in competition with the company after they cease to be a shareholder. In some cases this has a time limit such as for 6 months or for one year.

One of the key things to think about is that you want to be able to operate your company efficiently. You don’t want to be having a meeting over every little decision, but you want to have protection from members of your team over stepping their authority, be it maliciously or not. You also want to make sure, when the time comes, that your company is an attractive place for an investor to put their money. Being too open in your policies is as bad as being too closed off. Where the right balance is can only be determined by the unique nature of your company. This is why it is vitally important that you get a bespoke Shareholders Agreement drawn up to give your business the best chance.