Shareholders Agreement: Protect your company

A shareholders agreement is a contract between the shareholders of a company. Often the agreement will apply to all shareholders, but it can also relate only to specific shareholders, for example those who hold a certain type of share.

It will include:

How the company should be run
How important decisions should be made
When and how dividends will be paid
The shareholders' obligations to the company and each other
The shareholders' rights
Regulations for the proper sale of shares
Protections for minority shareholders

Do you need a shareholders' agreement?

The agreement is designed to set out the intentions for how the company should be run, and to establish a fair relationship between parties which protects against fallings out in the future, should one or more shareholders decide to deviate from the original plan.

This, in turn, protects the individual shareholder's investments in the company. For this reason, it is wise for all companies have a shareholders agreement drawn up.

Problems that can arise if you don't have a proper shareholders' agreement include:

Often, over 50% of the company is owned by one or two shareholders. This means that the majority shareholders carry all of the voting power. The agreement may state that some decisions must be reached unanimously, so that minority shareholders can still influence these important decisions.
Minority shareholders could stop majority shareholders from selling the company. The agreement may include a 'drag-along' provision which allows you to force a sale, so long as all shareholders are paid fairly as per their shares.
Minority shareholders, with less interest in the company, may be tempted to take confidential information to competitors or to set up a new company in competition. The agreement may include a Non Disclosure Agreement or Non-compete clause.
Someone could sell their shares to someone that does not share the best interests of the company. The agreement may include regulations regarding who you can sell to, for what price, and under certain terms.
You may own a company equally 50/50, or four shareholders with 25% each. If you disagree on a decision you may get completely stuck, leaving the company inoperable. The agreement may include a dispute resolution procedure to help you keep things moving forward.

Frequently Asked Questions

Is a shareholder agreement legally binding?

Yes. A contract, once signed, is legally binding so long as it meets these 4 aspects:

offer
acceptance
consideration, and
an intention to create legal relations.

However, the clauses must be written properly or they may be vulnerable to dispute. To be safe, have your agreement drafted specifically for your companies needs by an experienced solicitor.

Who needs to sign a shareholders agreement?

Each shareholder must sign, as well as a representative of the company.

Do I need a lawyer for shareholder agreement?

You can write the contract without a lawyer. However, the more pertinent question is Can you write your own shareholders agreement?

Are you able to write the clauses in such a way that there are no holes to dispute their parameters if there is a disagreement in future?

Can you foresee all of the issues that you need to include for every stage of your companies growth?

Is it worth risking the security of the company?

Do you want to protect your business with a shareholders agreement?

The process for settling a shareholders dispute can be long and costly. If you don't have a legal agreement setting out your rights, responsibilities and important procedures, then get in contact with us and see how we can help.

We can assist with: