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What Is A Shareholders Agreement? Do I Need One?

View profile for Craig Malarkey
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Answering the first part of that question is relatively straightforward.

A shareholders’ agreement is an agreement made between the shareholders of a private limited company. It governs their relationship with each other and, in some cases, with the company too.

The second part of the question requires a little more careful consideration.

The need for a shareholders’ agreement may arise in a number of circumstances – the introduction of a new shareholder into the company; obtaining funding; entering into a joint venture; or simply to regulate an existing relationship.

Whether there is a definite need for one will depend on each company’s individual circumstances – there may be other ways to deal with matters which could be covered by a shareholders’ agreement, for example amending the articles of association or entering into service agreements.

However, the key point is that it is vital for all company shareholders to consider the need for a separate and bespoke shareholders’ agreement.

Shareholders’ agreements are, in part an insurance policy to provide for circumstances where things have gone wrong, or when there has been an unexpected event. Typically when shareholders fall out or there is a death. Most standard articles of association will not adequately deal with these circumstances.

Consider who should obtain your shares if you were to die. Or what would happen ifa  fellow shareholder tried to sell his shares to someone from outside of the company (who was not already a shareholder). Under standard articles your shares would pass to your beneficiaries under your will (assuming you have one) and your fellow shareholder would be free to sell his shares to a third party. Is this really what you want?

Shareholders’ agreements are also beneficial in circumstances where there is an unequal weighting in the percentage of shares held. They can be used to offer protection to a minority shareholder to prevent manipulation to his disadvantage under normal company law, which generally provides that the majority rules.

A minority shareholder could pursue a claim against the majority shareholders or the company, however, this is expensive and has no guarantee of success. Setting out these matters in advance provides a level of certainty for all parties if differences arise – or alternatively prevents disputes arising in the first place!

Other matters to be considered are:

  • Dividend policies.
  • Rights on disposal – “tag along” or “drag along”.
  • Restrictive covenants and ways to protect the goodwill of the company.
  • Dealing with personal guarantees or other lending security.
  • Shareholder exit and shareholder death.
  • “Deadlock” or other dispute resolution.

No two companies’ circumstances are ever truly the same and we would recommend that shareholders speak with a suitably qualified legal advisor to decide what type of agreement is best suited for them.

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