Technical Articles – What is a Shareholder Agreement?

Posted in Articles

What is a Shareholder Agreement?

In simple terms, a Shareholder Agreement is a document that every company with more than one shareholder should have. It contains the basis on which the shareholders agree to operate the company, and in general terms provides the basis of a legal agreement between them. Some of the points set out below will also apply to partnerships.

A Shareholder Agreement is there to ensure that decisions are taken by consensus and discussion rather than unilaterally, or in whatever way has been agreed. It will provide clarity and certainty as to what can or cannot be done, reducing grounds for conflict, and most importantly provides a framework for dispute resolution, exit strategy and resolution of shareholdings in circumstances such as divorce or death of other shareholders. All these factors can cause costly difficulties if the shareholders do not make sufficient provision.

Key Points:
- agrees the basis for important decision-making
- defines a procedure for the resolution of disputes
- confirms the powers of the shareholders in the company individually or in concert
- prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company
- sets out the limits and procedures for how the company is to be operated
- provides a framework for exit strategies for the shareholders
- safeguards each shareholder’s financial interest in the company, and the interests of the shareholder’s family in the event of the death of a shareholder

Why have a Shareholder Agreement?

Whilst it does not replace the Articles of Association, and there is no legal requirement to have one, a Shareholder Agreement provides a level of protection for the parties involved in the ownership of the company against the actions of the other shareholders, whether minority, majority or equal shareholders.

Shareholders typically rely on common sense to resolve matters; they may well be married, family members or long-term friends. In either situation, anything that can be done to reduce the possibility of conflict is a good thing, and, whilst these matters are usually very far from the thoughts of business partners starting out in new venture, just like a marriage, things do not always work out as expected. A formal agreement prevents an impasse if things go wrong in the future.

While there is a lot to consider when starting a new company, it is prudent to take a longer-term view for the future. The mere formation of a company is relatively simple to achieve and allows a business to start trading. It does not, however, define responsibilities and more particularly the limits of responsibilities of the shareholders.

A Shareholder Agreement will remove and resolve some common potentially damaging issues such as:
- What happens if shareholders fall out?
- What happens if a majority shareholder dies or is divorced?
- Can you sell your shares to anyone?
- Are shareholders subject to any financial limits?
- What dividends will be paid and when?

Next steps

A Shareholder Agreement is not just applicable to new limited companies; if you do not have an agreement for an established company, it is not too late to take corrective action that may just save a lot of unnecessary cost and grief in the future. It is important to get the correct agreement that suits your circumstance. If you would like help with this, please talk to us.

Comments are closed.