What is a shareholders’ agreement?
The best way to look at a shareholders’ agreement is as a ‘safeguard’ between all or some of a company’s shareholders. It regulates
Without a shareholders’ agreement, there’s always the potential for disputes between the shareholders. Well-constructed agreements are designed to pre-empt disputes and set out appropriate ways for them to be addressed.
Too often, people set up companies with friends and relatives without protecting their interests … until it’s too late.
Many shareholders’ agreements are designed to protect minority shareholders or those with equal shareholdings (i.e. two shareholders holding 50% each).
A minority shareholder in a private company is especially vulnerable. There is usually no market for the shares of a private company. If you’re a shareholder who’s unhappy with the way a company is being run, you don’t have the option of selling your shares.
For example, as director, you could be removed from this position by a mere 50% of the other shareholders voting you out. This gives you very little security. You could end up being a shareholder with no management rights … unless you’re protected by a shareholders’ agreement.
Shareholders’ agreements can also be useful for majority shareholders.
As the majority shareholder, you may have sound reasons to curb the powers of other directors who are also shareholders.
For example, you may want to ensure that, if you want to sell your shares in the company, the other shareholder(s) are obliged to sell theirs too. This would prevent you from being held to ransom by a minority shareholder. You may also wish to think about appropriate non-competition and confidentiality covenants and provisions that require financial input from other shareholders.
If you just rely on standard articles of association, the following kinds of problem can arise – all problems that you can avoid through carefully worded shareholder agreements -
Here are just a few instances –
Let’s look at a few possible scenarios that a formal agreement would help avoid or resolve -
If there’s a stalemate between shareholders or directors in any respect, then the shareholders’ agreement can come into its own. It can provide for bringing in an independent expert to review the situation and advise on a course of action which the shareholders are then obliged to follow. Such deadlock provisions can be particularly helpful where there are only two shareholders holding 50% of the shares each.
A shareholders’ agreement can help in these situations by obliging shareholders to take out life insurance where the proceeds of the policy would automatically pass to the surviving shareholder(s). Known as a ‘cross option agreement’, this could then oblige the surviving shareholder(s) to use the proceeds to purchase the shares from the inheritors of the deceased shareholder, who would be bound to sell them.
Shareholders’ agreements can prove absolutely vital for the smooth, harmonious running of a business. Don’t leave things to chance or to shareholders’ goodwill and common sense. Talk to an expert. You don’t have to spend time and money on visiting a solicitor. We’re experts in Shareholder Agreements, and we’re here to help.
Find out more. Call us on 0116 473 6133 or send us an email.
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