Do I need a Shareholders Agreement, and what should go in it?

A shareholders’ agreement is a written agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. They also govern the way in which the company is run.

Typical issues covered in a shareholder agreement include:-

  • The management/running of the company including, removing, appointing, or paying directors.
  • Document the shareholders’ protections, rights, and obligations.
  • How the shares are to be owned, sold, transferred or new shares issued.
  • Define how important decisions are to be made.
  • Protect minority shareholders, those shareholders with 50% or majority shareholders.
  • Payment of dividends.
  • Dispute resolution procedures including deadlock provisions on a 50:50 company

The absence of a shareholders’ agreement opens up the potential for disputes and disagreements between the shareholders. If a dispute does surface, a properly drafted shareholders’ agreement has a mechanism in place to side-step litigation which carries the inevitable risk of time and money being re-directed away from the company and shareholders.

In the absence of a shareholders’ agreement a minority shareholder with 50% of the shares or fewer has little control over the company and can find themselves at the mercy of the majority shareholders who have the controlling interest. A well drafted shareholders’ agreement can redress the balance for the minority shareholder.

From a majority shareholder perspective, the shareholders’ agreement can provide the tools to help the majority shareholders remove an unhappy/nuisance/underperforming minority shareholder. Such mechanism can also force the sale of the minority shareholders shares, at an agreed or fair valuation, often called a “drag along” provision.

It is not uncommon for shareholders to operate a company on a 50/50 shareholder basis. If a dispute arises between those shareholders and a shareholders’ agreement is not in place, this can result in deadlock meaning that the company is not able to operate and may face potential liquidation.

Confidentiality can be critical to the company as well as the shareholders. A well drafted shareholder agreement can make provision for how the shareholders are bound by confidentiality.

As your company grows it is inevitable that investment may be required, or succession planning will need to be implemented. Any potential investors or buyers will expect to see a shareholders’ agreement is in place to show good governance and the company has been well run.

Very few shareholders believe that a dispute could ever happen to them. It is only when conflict arises those shareholders, whether they are minority shareholders, those in deadlock with 50% or majority shareholders discover that they should have entered into a shareholders’ agreement. If the financial predictions in the press are to be believed tough times are ahead and when that happens, conflict is not far away. If you are a shareholder without a shareholders’ agreement it is suggested that you put one in place – sooner rather than later.