Shareholders agreements explained.
What are they?
Shareholders agreements are private arrangements between the shareholders in a company.
They deal with the same sort of matters as are commonly found in partnership agreements.
Typically these are:
- what each shareholder brings to the business;
- how the company will be run;
- what happens if one of the shareholders leaves for any reason, be it retirement, death, expulsion or after a disagreement.
Why have one?
Shareholders agreements are used because even the smallest company has to operate under the same rules as much larger organisations.
In reality a small company is often more like a partnership than a quoted company. Using a shareholders agreement allows the best of both worlds. The company can be run as if it were a partnership with the advantages of limited liability or whatever other reason was behind forming the company in the first place.
The disadvantages of not having a shareholders agreement
In a partnership all the partners are entitled to a share in management and to know what is going on. In a company whoever owns 51% of the shares effectively runs the business unless a smaller shareholder can afford to prove that they are seriously abusing their power. This means that if for example there are three equal shareholders any two can exclude the third from taking part in the management of the company or remove him as a director.
A partner can dissolve a partnership at any time and take out his share of the assets that have been built up. If a shareholder leaves he cannot force anyone to buy his shares. This means if he leaves, dies or is thrown out his capital may be very difficult to recover and the other shareholders can continue using it as an interest free loan for ever.
Any company ought to have provisions setting out how any capital growth is going to be realised should the need arise. This is much easier to agree before there are any capital profits and the shareholders personal circumstances change.
- Most shareholders agreements will say how many shares each party owns and how much they are investing in the company.
- The agreement should say who is to work in the company and on what terms.
- All the shareholders will usually be entitled to be directors.
- There will be a list of matters that cannot change unless all the shareholders agree.
- It may be possible to agree whether profits will be shared out or left in the company.
- Shareholders may be required to insure their lives so that if they die the others have a fund to buy their shares.
- There will be provision for a shareholder to retire in a way that gives the others a chance of buying his shares.
- Sometimes there will be provisions that if someone leaves the others either buy their shares or the company is closed down so that the retiring shareholder can realise his investment.
Creating a Shareholders Agreement
Shareholders can create a shareholders agreement at any time. Usually all that is needed is one or two meetings with the company’s solicitors to discuss what is needed. The shareholders agreement can then be drafted. It may be sensible to put some of the agreed terms in new Articles of Association which can be prepared at the same time. The documents will usually only need minor adjustments before they are ready to be signed.
The advantage of preparing a shareholders agreement as soon as possible is that deciding what is to be included will sometimes highlight areas where the shareholders have different expectations. The problem with delay is that everyone can usually agree what would be a fair solution before circumstances change – but not afterwards!
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This article is for general information only. No responsibility can be accepted by Newtons Solicitors for any loss suffered by anyone acting or refraining from action as a result of anything on this website. We recommend you take independent legal advice in relation to any particular shareholders agreement.