Although shareholders’ agreements are not required by law, it’s often a good idea to put one in place when starting your business. When setting up a company you like to hope things won’t go wrong in the future but if they do it can be difficult to find a solution if the relationship has already broken down. Putting a shareholders’ agreement in place early on is a great way to prevent problems from arising later on down the line.
What is a shareholders’ agreement?
A shareholders’ agreement is a contract between the shareholders of a company to document the relationship between them. It provides clear guidance on their rights, obligations and what should happen in particular circumstances. This can include:
- How shares can be transferred
- How dividends are payable
- Protection for minority shareholders
- Alternative Dispute Resolution in the event of a dispute
What are the benefits?
- Control over who owns shares in the company
A shareholders’ agreement can require existing shareholders to have first refusal to purchase shares providing security over who can and cannot acquire shares in the company.
- It can require an employee who leaves the company to sell their shares back
Without a shareholders’ agreement, if a shareholder were to leave the company they can continue to hold shares and benefit from the business, despite the fact that they are no longer employed. A shareholders’ agreement can require shares to be sold back to the business upon termination of their employment.
- Confidentiality
Shareholders’ agreements do not need to be filed at Companies House meaning that the contents can be kept confidential between the parties.
- Resolving disputes
If shareholders reach a stalemate or fall out, an agreement can provide for Alternative Dispute Resolution through Mediation or Arbitration. Including provisions for Alternative Dispute Resolution means that parties are all on the same page if the relationship sours and may mean that costly litigation is avoided.
- Greater protection
Shareholders’ agreements provide a greater level of protection than articles of association. This can be particular beneficial in providing assurance to any potential investors.
- Restrictive covenants
Restrictive covenants can be included preventing shareholders from setting up a competitor or poaching clients and employees after exiting the company.
- Greater control
A shareholder’s agreement can require a specific level of approval for specific actions or decisions by some or all shareholders, providing a greater level of control over the company.
These are just some of the benefits that a shareholder’s agreement may provide to your business and it is often sensible to put one in place.
If you would like to discuss putting a shareholder’s agreement in place for your company, please get in touch with us.