What is a Shareholder's Agreement and Do you Need One?

Posted 15th July 2021

Written by Malcolm Jones

Two shareholders making a verbal agreement via a handshake.

Although you may never need to rely on it, shareholder’s agreements are useful for anyone going into business with others. So why have a shareholder’s agreement? Well, not only does it give all parties involved confidence that the business and their investment will be protected, but they’re also essential when it comes to dispute resolution, amongst many other reasons. We explain in more detail whether you need a shareholder’s agreement, what should be included and when to make one.

What is a shareholder’s agreement?

Shareholder’s agreements are private arrangements between the shareholders in a company. It can be between all shareholders or a selection to help protect investment, creating a balance within the relationships of all those included and essentially determining the company’s running.

They deal with the same sort of matters that are commonly found in partnership agreements.

Typically, shareholder’s agreements outline:

  • what each shareholder brings to the business
  • how the company will be run
  • company share sales and transfers
  • how specific business decisions are to be made
  • what happens if one of the shareholders leaves for any reason, be it retirement, death, expulsion or after a disagreement

What should be in a shareholder’s agreement?

There isn’t anything that has to be included in a shareholder’s agreement necessarily. What to include in your shareholders agreement depends on the size and nature of the business, and the number of shareholders and their share percentage.

Below, we’ve highlighted in detail typical items and terms you can expect to find in a shareholder’s agreement:

  1. Party shares, roles and board meetings

Most shareholders agreements will say how many shares each party owns and how much they’ve invested in the company. The agreement will typically outline who is to work in the company and on what terms, with all the shareholders usually entitled to be directors. It’s common for agreements also to outline how often a board should meet.

  1. Reserved matters

This is a list of matters that cannot change unless all the shareholders agree. For example, a board of directors could not progress with any item on the list of the reserved matters without shareholders’ approval.

  1. Selling, transferring and purchasing shares

Restrictions and guidelines on shareholders selling, transferring and purchasing shares will usually be included in the agreement. Specific provisions on this will also be included, to outline, for example, a shareholder to retire to give the others a chance of buying their shares. Or if someone leaves, the others either buy their shares or the company is closed down so that the retiring shareholder can realise their investment.

  1. Restrictive covenants

Restrictive covenants will often be added to the shareholders agreements so that anyone departing the business is restricted in setting up a competing business in a way that is necessary to ensure the current business is protected. If the leaving party was to take clients, suppliers and even other employees away from the business, then this could significantly damage the business, which is why these measures are usually included.

Do you need a shareholder’s agreement?

Shareholders agreements are needed for companies of all sizes because even the smallest company has to operate under the same rules as larger organisations. However, having a shareholders agreement isn’t a legal requirement, so what are the reasons for having one? Find out below.

Why have a shareholder’s agreement?

  1. Protection of investment

Shareholders agreements can be designed to contain articles and outline procedures that are in the business’ best interests and to protect the investment placed by the shareholders. Although there are common features included in most shareholders agreements, they’re based around each company, which is why they’re so important to protect everyone’s interests.

  1. Resolving disputes

Typically, shareholders agreements will outline a procedure that the shareholders need to follow should disputes occur. This can save a great deal of time and frustration and potentially help lead to resolution between the shareholders.

  1. Confidentiality and rights to documents

Not only can shareholders agreements address whether the company’s information is publicly available, but they can also highlight individual shareholders’ rights to certain business documentation. These can include accounts documents, minutes to meetings and various other documents.

  1. Minority shareholder protection

Shareholders agreements are a great form of protection and security for minority shareholders. It gives these shareholders a voice within the business on subjects they may not have had much influence on without the agreement, such as distribution of profits and large spending.

  1. Majority shareholder protection

Although majority shareholders may not need as much reassurance as minority shareholders, if they are an investor in the company and don’t want to be involved in managing the company, it may be necessary to include protections within the agreement so that their investment and interests are protected.

  1. Business stability

A shareholders agreement signifies stability to the bank and creditors when trying to raise capital. It also helps outline the course of action if the business is ever up for sale in the future and again demonstrates stability to buyers.

  1. Varied dividends

When shareholders have different percentages of shares, it’s important to have a shareholders agreement to set out a varied dividends policy so different dividends can be payable to all shareholders at an agreed rate. This can solve much dispute and frustration in the future, especially if the company should experience a period of reduced profit at any point.

  1. Regulation of company management

Restrictions on the decisions made by the directors of the company can ensure protection on the management of the company for shareholders. By regulating company management, the shareholders can protect their interests by requiring consent for particular management decisions from the board.

  1. Transference of shares

There are many reasons and circumstances that transference of shares may be required, for example, retirement or death of a shareholder. However, to ensure the transference (or sale) of shares is done in the best interest of the company and the remaining shareholders, it’s important to include this within a shareholders agreement.

  1. Deed of adherence

A shareholders agreement can be amended, and deeds added, meaning a new agreement doesn’t need to be drawn up should a new shareholder join. A deed of adherence is added when a new shareholder joins a company, and there is already a shareholders agreement agreed. This saves a great deal of time and money for all parties involved, and means business can continue without interruption.

When to create a shareholder’s 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 that can be prepared simultaneously. The documents will usually only need minor adjustments before they are ready to be signed.

The advantage of preparing a shareholder’s 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 on a fair solution before circumstances change – but not afterwards!

It can be difficult to know what should be in your shareholders agreement if you’re starting a new business. To find out more about creating a shareholders agreement and how our team can help, please contact us.