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Shareholders’ Agreement: What is it and when do you need one?

Shareholders Agreements

If you run or have just set up a business, you might be considering whether you need a shareholders’ agreement. In our latest blog Lauren Kilbride, a Trainee Solicitor in Rotheras’ corporate and commercial department, explains what shareholders’ agreements are, the benefits of having one and the risks involved by failing to have a shareholders’ agreement in place.

Written by
Lauren Kilbride
Trainee Solicitor

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contract between some or all of the shareholders of a company which governs:

  • the relationship between the shareholders;
  • the way in which the company is run;
  • how the shares can be dealt with; and
  • the protection of the shareholders.

Why do I need a Shareholders’ Agreement when the company has Articles of Association?

When you set up a limited company it must, by law, have a set of Articles of Association (the ‘Articles’) whether default or bespoke. A Shareholders’ Agreement, by contrast, is not compulsory.

Though the Articles set out the rules of the company, they do not necessarily give much protection to shareholders, nor do they give control to shareholders in respect of decision making within the company. This is where a Shareholders’ Agreement can be hugely beneficial.

The Articles set out how a company is run on a day-to-day basis by the directors. The shareholders do not get involved in decision making for the company unless shareholder approval is specifically required, for example, to remove a director.

The benefits of having a Shareholders’ Agreement:

1. Protection for the shareholders

If things do not go as planned within the company, the agreement can protect the shareholders by determining what happens in the event of a dispute. If there is no Shareholders’ Agreement, the possibility of disputes and disagreements is higher and this may affect not only the relationship between the shareholders, but the company itself.

2. Private document

A Shareholders’ Agreement is a private contract between the shareholders. Unlike the Articles, a Shareholders’ Agreement is not required to be filed at Companies House for the public to see. Therefore, detailed information can be included in a Shareholders’ Agreement and it will always remain confidential between the shareholders.

3. Preferred by lenders

Lenders may prefer a company to have a Shareholders’ Agreement in place because it can reveal a lot about the company and how it is managed. Lenders will prefer to have more information about the company if they are considering lending money to them. The agreement will also demonstrate to the lender that the shareholders have planned ahead, which demonstrates good business sense by the shareholders.

4. Dividend policy

The agreement can include a dividend policy and this can set out how, or when, the shareholders may receive dividends from the company. The Articles do not go into detail on this, therefore it is of great benefit for the shareholders to have an agreement in place to ensure this is dealt with as intended.

5. Dealings with shares

A Shareholders’ Agreement can provide clarity and certainty on the issue of dealing with shares. For example, if a shareholder wishes to transfer their shares to a third party, the Shareholders’ Agreement can include a “right of first refusal” over those shares for the existing shareholders. This will give the shareholders more control over who acquires shares in the company.

6. Ability to change the level of consent required for certain decisions

It may be the case that the shareholders would like more control over company decisions, rather than simply leaving the directors to make those decisions. A Shareholders’ Agreement can be of assistance here. For example, the shareholders may want to change the level of consent required for company expenditure or other financial arrangements or commitments.

What if I don’t have a Shareholders’ Agreement?

You may have set up a company with family or friends and think that nothing will go wrong. However, if there were to be a disagreement or dispute, you will have only a limited ability to protect your interests as a shareholder under the Articles.

A Shareholders’ Agreement, as a contract, provides remedies if any provisions in the agreement are breached, allowing the recovery of losses through court action by way of damages. Relying on the Articles, on the other hand, merely makes an action (for example, a transfer of shares to a third party) void. This may not be to the satisfaction of the shareholders if they have suffered a loss and are looking to be compensated.

If you have any questions regarding Shareholders’ Agreements or Articles of Association, or need advice on any corporate issues, please contact Billy Shaw, a solicitor in the corporate department at Rotheras on 0115 9106 231 or by email to b.shaw@rotheras.co.uk

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