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Your company may need a shareholder agreement to govern the relationship between directors and shareholders. This is a private document, not publicly viewable via the Companies House website, that details the rules and processes for resolving disputes between directors and shareholders to avoid personal or business conflicts. This article will explain what you need to know about shareholders’ agreements to help determine if you need one for your business.
When is a Shareholders Agreement Useful?
A shareholders agreement can prove helpful when your company has multiple directors or shareholders. One of its primary purposes is to set out a process to resolve future disputes between directors or shareholders. This could be concerns about the day-to-day running of the business or personal conflicts. A shareholders agreement can also provide a safe route from holding shares in a private business and protect the company from harm, ensuring it can continue with or without its current cast of directors or shareholders. For example, setting out emergency measures allows a sole director to make critical decisions when the other director is severely unwell.
If you run a private company with family members as equal shareholders and get into a dispute with a family member over a decision, a shareholders agreement protects the interests of the family business. It protects the rights of the remaining shareholders by putting restrictions on the creation of new shares or the identity of any new shareholder.
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What Does a Shareholder Agreement Do?
A shareholder agreement should fit the circumstances of your company. If your business has two shareholders, it will play a different role than if it has, for example, five directors and nine shareholders.
Many shareholder agreements will share some common themes, including:
- protecting investments into the company by shareholders;
- setting out the process of crucial business decisions;
- setting rules to govern the future sale of shares;
- setting out how many directors or shareholders are needed to take critical actions, such as the agreement of business deals; and
- describing the future aims of the company.
The agreement can also set out what happens to the shares of a deceased shareholder. It can specify whether their shares are given or sold to existing shareholders or passed through inheritance. This can be important in cases where someone may inherit the shares, become a majority shareholder and potentially take control of the business.
An Example
A helpful way to explain how a shareholder agreement works is through an example. If your business has two shareholders, each holding a 50% share in the company, your ownership will be equal. As neither shareholder has a majority holding, absent a shareholder agreement, decisions must be made jointly and agreed upon by each shareholder.
However, this will be an issue when shareholders disagree on matters. Therefore, a shareholders agreement is beneficial to break any deadlock as it can, for example:
- allow one shareholder to make certain decisions; or
- dictate the circumstances where one shareholder can sell their shares.
A shareholders agreement can also regulate the share-selling process. If the other 50% of shareholders in your business have elected to leave, they need to sell their shares. Your preference may be that they either sell them to you or someone you want to do business with. You may also like them sold at a reasonable price. Accordingly, you can detail these preferences in the shareholders’ agreement.
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Key Takeaways
Shareholder agreements set out what directors or shareholders can and cannot do. For example, they may set out how to achieve dispute resolution where two directors cannot agree on any decision, and one has to leave the business. Shareholder agreements may be necessary for your company if, for example, you wish to detail certain conditions concerning how shares are sold in your business.
If you need help with a shareholders agreement, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A shareholders’ agreement is legally binding, meaning you can enforce it against a director who refuses to comply. The first step would usually be to obtain advice from a lawyer on the content of a suitable letter to them.
Can a shareholders’ agreement be updated or replaced?
You can update or replace a shareholder agreement like any legal document. However, you will need either the majority or unanimous consent of shareholders. A well-drafted shareholders agreement should specify the rules to effect any legal change to the agreement.
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