When starting a company with more than one shareholder, it is advisable for the shareholders to enter into a Shareholders’ Agreement in order to regulate both the relationship between them and the way in which the business is to be run. So, why is it worthwhile putting a Shareholders’ Agreement in place?
There are several reasons why entering into a Shareholders’ Agreement is a sensible thing to do:
Regulation of Relationships
It acts as a form of ‘pre-nuptial agreement’ between the shareholders, enabling them to formalise the approach that should be taken in the circumstance that their relationship turns sour, whilst their relationship is still strong. This will help the shareholders to ensure that a fair solution can be reached in the event that their relationship does break down.
Minority Shareholder Protection
It can assist with regulating the management of the company and offer minority shareholders protection. A Shareholders’ Agreement can specify that certain decisions require shareholder approval; it can state that this must be unanimous consent, or a 75% majority in specific circumstances involving major decisions of the company. This can be especially helpful for companies that have shareholders who are not also directors.
Majority Shareholder Protection
It can offer majority shareholders protection by including “drag along” provisions. This allows the majority shareholders of a company to force the minority shareholders to sell their shares if an offer is made to buy the entire shareholding, so as to prevent the transaction falling through.
Dividend Policy
It can stipulate a dividend policy, which can assist with setting expectations about the amount of profit that will be distributed to shareholders and the amount that will be retained by the business.
Exit Strategy
It can provide for what will happen on death, illness, resignation, retirement or if someone is asked to leave the business. The shareholders will need to carefully consider how a departing shareholder’s share will be valued in the aforementioned circumstances.
The above demonstrates just a few reasons why a Shareholders’ Agreement is a very useful and important document for a company to have in place. Nevertheless, these points are by no means prescriptive and any Shareholders’ Agreement will need to be carefully tailored in order to meet the needs of a company and its shareholders. In addition, any Agreement should be reviewed periodically to ensure that its provisions accurately reflect the company’s and the shareholders’ wishes.
To discuss a Shareholders’ Agreement please contact our Corporate and Commercial Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.