Do you need a shareholders agreement?

A shareholders’ agreement is a legal document that outlines the rights, responsibilities, and obligations of the shareholders and business partners within a private company. It is a private contract amongst the shareholders and is not required by law, but can detail how a company will be run.

This is unlike the company’s articles of association, which are a public document and a legal requirement for the formation of a company in England and Wales at Companies House. But, do you need a shareholders agreement?

Do you need a shareholders agreement?

Whilst it’s not a requirement under company law to have a shareholders’ agreement, having one is often considered advisable in the interest of the company for several reasons.

Control and decision-making:

A shareholders’ agreement allows shareholders and directors of the company to outline the day to day management of the company. It also allows them to define how major business decisions will be made. This aids in providing business stability as well as clarity on decision-making processes and preventing potential disputes.

Share transfer restrictions:

A shareholders agreement can set limits on the transfer of shares. This allows shareholders to have a say in who can become a invested in a company. A shareholders’ agreement can include provisions such as pre-emption rights or restrictive covenants on share transfers to restrict shareholders from offering their shares to third parties.

Conflict resolution:

The agreement can establish mechanisms for resolving disputes among shareholders, potentially avoiding costly and time-consuming legal battles.

Management and board structure:

If shareholders agree to customise the composition of the board of directors, specify the roles and responsibilities of each shareholder, or outline the company’s management structure, a shareholders’ agreement is a suitable tool.

Minority shareholder protection:

A shareholders’ agreement can include provisions to protect the rights of minority shareholders, ensuring they have a voice in important matters. Provisions can be added for certain decisions that require unanimous consent of all the shareholders. This can also minimise disputes between minority and majority shareholders.

Exit Strategies:

It can outline exit strategies for shareholders, addressing situations such as the sale of the company, right of first refusal, or drag-along provisions and tag-along rights, especially in the context of a “bad leaver.”

Bad Leaver Clause:

A specific clause within the agreement may define what constitutes a “bad leaver.” It can outline the consequences for such shareholders, protecting the interests of the remaining shareholders when the shareholder leaves.

Pre-emption rights:

Pre-emption rights give existing shareholders the right of first refusal to purchase if a shareholder wishes to sell their shares. This ensures that the shares are first offered to existing owners before being sold to outsiders.

Confidentiality and Non-Compete Clauses:

If there are sensitive business operations, a shareholders’ agreement can include clauses to maintain confidentiality and restrict competition by shareholders.

Dividend Policy:

If you want to establish a specific dividend policy, the agreement can detail how dividends will be distributed among shareholders.

Having a well-drafted shareholders’ agreement can help prevent misunderstandings, clarify expectations, and provide a framework for the smooth operation and success of the company.

It is advisable to seek legal advice when drafting a shareholders’ agreement to ensure it aligns with the legal requirements and specific circumstances of the company and its shareholders.

How can Expert Commercial Law assist?

If you are still asking the question “do you need a shareholders agreement?”, contact Expert Commercial Law today to speak to a solicitor on our panel.

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