8 Reasons To Have a Shareholders’ Agreement

PURPOSE

Even though there is no legal requirement to have a formal shareholders agreement, every company with more than one shareholder is well advised to have one. Shareholder agreements ensure that the running of the company and the responsibilities of the shareholders are properly thought through, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion. As a result, it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably. Putting such an agreement in place is often quite far from everyone’s thoughts when starting a new business, but it is better to get a shareholders agreement put in place at the outset because, further down the line, views will almost certainly diverge, circumstances change and resentment can build between shareholders leading to fractious disagreement in respect of the company. It is, however, essential that a full business owner’s fact find is carried out before setting up a Shareholder’s Agreement. All companies are different and the business owner’s fact find will help to identify other need areas or potential conflicts that may need addressing so that the Shareholders Agreement is set up correctly.

 

BENEFITS

Here are the following key benefits that make having a shareholders’ agreement important:

1.      Protection

The agreement works in conjunction with a company’s articles of association, but will give shareholders greater protection than is provided by the articles alone, not least because companies are often set up quickly and cheaply just with standard articles. These standard articles will not include much detail regarding protective provisions for shareholders or define the limits of their responsibilities.

2.      Flexibility

Ordinarily a company is subject to control in accordance with the comprehensive body of company law (contained in both statute and case law) which governs how a company should be run. However, a shareholders’ agreement can contain any arrangement agreed between the shareholders and can vary what would otherwise be the legal position without it.

3.      Decision Making

Unless agreed to the contrary in a shareholders agreement, the management of the company is determined mostly by the board of directors, while certain key decisions (particularly anything relating to ownership) are required to be made by the shareholders in general meetings (or by written resolution). Therefore an agreement is important to fully determine the basis for important decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

4.      Privacy

As opposed to articles of association which is a public document made available at Companies House, the shareholders agreement will remain private and confidential and will not be open to view by others such as creditors or non-member employees.

5.      Dispute Resolution

Having a shareholders agreement is a cheap way to minimise any potential business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.

6.      Finance Potential

The existence of a shareholders agreement can assist in raising finance from banks or creditors and also demonstrates the stability of the business to other potential partners.

7.      Succession

It prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death of a shareholder.

8.      Minority Shareholder Protection

A shareholders agreement protects the rights of minority shareholders and the investment value of their shareholding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place a shareholders agreement can only be amended with the agreement of all of the shareholders whereas the company’s articles of association can be changed by a 75% majority meaning that a shareholders agreement provides better protection for minority shareholders.

 

 

If you think you might benefit from a Shareholders’ Agreement, please email Warren McCleary at warren@mcclearyaccountants.com or phone him on the office number 028 3831 6111.

Tags: , ,

Switch to our mobile site