Shareholder Agreements

What is a shareholders agreement?

A shareholders agreement is a document that governs the relationship between shareholders of a company, sets out the rights and obligations of the shareholders and regulates the sale of shares in a company.

Why do you need a shareholders agreement?

It is easy to assume that as you have a good working relationship with your fellow shareholders, you don’t need a formal document that sets out your working arrangement. However, if a situation arises in future where there is a disagreement, a well thought through shareholders agreement will give individual shareholders legal protection and help avoid costly litigation.

Who needs one?

Any shareholder in a company with more than one shareholder should consider the benefits of a shareholders agreement. Whilst a shareholders agreement is recommended for every company, there are certain situations in which it might be more relevant.

For example: 1. Where an employee is issued shares or granted a share option as an incentive for their loyalty – in such a case you need to ensure that there share transfer provisions to apply in the event that they cease to become an employee.

2. ‘Dragons Den’ type scenario – A third party investing money into your business. In such a scenario, the investor will want some control over the company to protect their financial stake.

3. A company that offers professional services (Solicitors, financial advisers etc.) where a shareholders agreement will contain provisions so that if one of the shareholders is struck off and no longer able to carry on with their professional duties, then the other shareholders would be able to force a transfer of that person’s shares.

How does the shareholders agreement protect a minority shareholder?

Without a shareholders’ agreement, a minority shareholder will generally on their own have little control or say in the running of the company. However, a shareholders’ agreement that includes the requirement for all shareholders to approve certain decisions ensures that minority shareholders have a say in the important decisions that impact the company. A minority shareholder may also want a provision included that if someone is willing to buy the shares of a majority shareholder, that shareholder can only sell the shares if the same offer is made to all shareholders. This is often referred to as a “tag along” provision and this ensures that minority shareholders receive the same return on their investment as the other shareholders. How does a shareholders agreement protect the majority shareholder? If a majority shareholder wants to sell their shares but a minority shareholder is unwilling to agree the terms of such a sale, then including a provision forcing that minority shareholder to sell their shares is important otherwise the minority shareholder could hold the majority shareholders to ransom. This is often referred to as a “drag along” provision. This will then allow the majority shareholder to realise their investment at a time and price that they feel is appropriate.

Another concern is that a minority shareholder could transfer their shares to someone that the majority shareholder may not approve. To overcome this problems, a shareholders’ agreements will often be drafted to include rules around share sales and transfers – who shares can be transferred to, on what terms and at what price. Every situation requires careful thought and professional advice to ensure that the documentation is suitable for the intended purpose. As with any other legal documents, it is extremely important that you obtain professional legal and protection advice to give effect to your specific requirements and to ensure that that you and your business are fully protected.