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Do I need a shareholders’ agreement?

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By Richard Turner, Alpaca


Do I really need a shareholders’ agreement?

If you’re starting a new business with friends or family, it’s tempting to assume that you’ll always be able to have an amicable discussion to resolve any issues. Unfortunately, the reality is that people fall out and that can just as easily be when things are going really well as well as when things aren’t quite working as planned. That is were a shareholder agreements can come in.

Of course, such a fall-out can have significant consequences, not just for the shareholders in dispute, but for the business itself. 

What is a shareholders’ agreement ?

It’s a private agreement between shareholders which controls and governs the parties’ relationships with each other – liken it to a pre-nup and you won’t be far wrong but hopefully nobody gets offended when you ask for one!

What does it do ?

Typically, it will set out procedures and protections around such things as decision-making, ownership and dispute resolution and therefore potentially save time, money and stress if things aren’t quite going to plan.

Some of the issues that it would typically cover include: 

  • Important business decisions

Day to day, a company is run by the directors but shareholders’ agreements often contain a list of critical matters that require the consent of a particular shareholder or shareholders before they can be implemented by the company.

  • Falling out, leaving or death of a shareholder

What happens if your fellow shareholder is swinging the lead or wants to leave? What happens if a shareholder dies and their shares pass to their estate?

Many people wrongly assume that there are restrictions under company law on shareholders selling or transferring their shares to third parties. This is not generally the case and one of the most critical provisions for any shareholders agreement to include is a restriction which stops a shareholder from transferring their shares without first offering them to the other shareholders. In the case of death, the price can sometimes be covered by the proceeds of an insurance policy.

Shareholders’ agreements can also contain a provision that forces an employee to sell their shares in the event that their employment with the company comes to an end. Without such a clause, it is possible that the departing employee can continue to hold on to any shares which can be at best a nuisance or more seriously block certain key decisions from being made. Sometimes a distinction is made between so called ‘good leavers’ and ‘bad leavers’; with good leavers often receiving fair value for their shares and bad leavers receiving a lower or nominal value.

  • Restrictions

You can stop your fellow shareholder resigning and setting up in competition with the company by including covenants to stop them from, for example, competing with the business or poaching customers or staff. These restrictions can apply both while they are a shareholder and for a period of time after they no longer hold shares.

  • Disputes

Shareholders’ agreements can provide a mechanism for resolving disputes between the shareholders. You can even cover the situation where there’s a potential business crippling deadlock by including something like a simple casting vote, the appointment of an independent expert or, in the most extreme cases, liquidation of the company.

Can a shareholders’ agreement be amended?

What happens if things change? A shareholders’ agreement might specify how an amendment should be made, for example it might require a majority vote. Otherwise, as a general rule, a shareholders’ agreement can be amended as long as all parties who are signed up to the agreement agree.

To have or not to have?

You don’t have to have a shareholders’ agreement, it’s not a legal requirement of running your own company but its probably a good idea for peace of mind so that you can carry on running your business without worrying “what if?”

Expected Costs

Costs can range depending on the complexity of the agreement and also the company you coose to draw this up. Expect costs between £500 to 2k.

Want to know more about terms and conditions for your business? read our no nonsense guide by clicking here.

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