5 reasons why you should put a Shareholders’ Agreement in place

A Shareholders’ Agreement is a contract between shareholders that documents their rights and obligations to each other, and often also to the company.  Shareholders’ Agreements usually have a purpose of providing a framework for decisions to be made, and disputes to be resolved. So why should you put one in place?

1. To manage and resolve a dispute

Shareholders can and will, more often than many expect, fall out, and disagreements arise between them.  It is far easier to formalise the approach to be taken before any fall out occurs by having a well drafted Shareholders’ Agreement in place from the outset, providing a mechanism to resolve disputes efficiently to protect the company.  There are a number of mechanisms that can be considered, for example a requirement to submit to mediation, or a ‘deadlock’ provision.

2. Provides a framework and demonstrates stability

A Shareholders’ Agreement can set out the intentions as to how shareholders will work together, and set out the ground rules for decision making, particularly where the shareholders do not wish for certain matters to be left to the discretion of the directors. It can also provide clarity and consistency regarding the running of the company by detailing provisions in relation to the management of the company. A Shareholders’ Agreement helps to show that shareholders have planned ahead for the business, which in return can form a good impression if seeking finance or investment from third parties.

3. Offers protection for minority shareholders

A Shareholders’ Agreement can contain ‘tag along’ provisions enabling minority shareholders to ‘tag along’ with majority shareholders in a share sale situation.  This will allow the minority shareholders the option to avoid being left behind where the majority shareholder attempts to sell only their shares to an unknown third party.

4. Offers protection for majority shareholders

Similarly to ‘tag along’ rights, majority shareholders can also offered protection in the form of ‘drag along’ provisions in the Shareholders’ Agreement.  This would operate where an offer is received to buy all of the shares in a company that the majority shareholders want to accept, allowing them to ‘drag’ the remaining shareholders along on the sale.

5. Consent and control

A Shareholders’ Agreement can be drafted to ensure that any shareholder wishing to exit the company has ‘restrictive covenants’ placed on them to prevent them, for example, partaking or setting up a competing company, or providing services to the company’s clients.  Pre-emption rights (a right of first refusal) can also be included to control the transfer of shares in the company, which is particularly useful for smaller companies who do not wish to have external and unknown individuals coming into the company.

If you have any questions as to how a Shareholders’ Agreement could benefit you and your company, please call the Corporate team on 0113 207 0000.