Shareholder Agreement – Why Have One?

When setting up a company, particularly with family members or friends, it may appear that a Shareholder’s Agreement will not be necessary in the belief that any disputes will be amicably resolved. However the decision not to draw an agreement at the time of formation of the company should not be taken lightly as relationships can breakdown. Therefore such an agreement provides a means of safeguarding the company and its affairs. Unlike the company’s Articles of Association, there is no legal requirement to have a Shareholders’ Agreement.

So what is a Shareholders’ Agreement? It is a legally binding agreement between the shareholders of the company which governs the relationship between the members, company and how the company is run.

Whilst most of these issues are dealt with in the company’s Articles of Association, there are privacy benefits attached with having an agreement as there is no legal requirement to file the document with Companies House. Therefore, the company will not be under an obligation to disclose the document to the public. The document is governed by contract law and any alterations and a decision to terminate it can be made by agreement of the members without the need to comply with the formalities as outlined in the Companies Act. Consequently, the shareholders can agree to deal with matters in the Shareholder Agreement which can be omitted from the company’s Articles of Association whilst safeguarding its confidential information.

A Shareholder’s Agreement will be particularly important in protecting the interests of minority shareholders by requiring unanimity when making some decisions. Examples include allotment and transfer of shares. The default position is that the majority will rule and therefore in practical terms once a 75% majority is met, any decisions can be taken without any regard the views of the minority shareholders.

Similarly, the agreement can be used to devise a mechanism to control the transfer of shares to restrict who may or may not acquire shares in the company. This mechanism can in fact import the ‘right of first refusal’ rule which can effectively prevent external investors from becoming members. For small businesses in particular, this can prove to be a useful means of retaining control.

A company will no doubt want to benefit from the fruits of its own labour and therefore protect the interests of the company and its remaining shareholders. A Shareholder’s Agreement can therefore contain provisions which are stricter than those contained in a standard employment contract. This can prove to be a useful tool when a member seeks to exit and therefore, the company can be assured that it is protected from competing business from its ex-members.

Also, disputes in some cases are inevitable. Therefore a Shareholder’s Agreement can be utilised in providing a dispute resolution procedure including arbitration. It is impossible to provide a medium to deal with every eventuality. However, is important for the agreement to be within the framework of company law; for example ensuring that the shareholders are not deprived of their basic rights.

At CH Legal our team can provide you with assistance and advice in relation to any queries you may have regarding a Shareholders’ Agreements. Contact mohammed.asif.malek@ch-legal.co.uk for more information.