A Shareholder’s agreement is a legally binding arrangement between the shareholders of a company. It sets out how the Company should be operated, as well as the rights and obligations of the shareholders.

What are the key components of a shareholder’s agreement?

  • Shareholders rights and obligations: The agreement will set out what entitlements a shareholder may have, such as voting rights, dividend entitlement or capital on the winding up of the company. This ensures that each shareholder (regardless of how many shares they have) are treated fairly and have their interests protected.
  • Pricing of Shares: This sets out the value mechanism for shares during sales or transfers. It is also possible to build into this provision if the shareholder was an employee of the company that if they left on bad terms (through Gross Misconduct for example) they would only receive a nominal value for the shares. This is an important component, as clear and thorough drafting can make sure there are no potential disputes.
  • Transfer of shares: This component can install pre-emption rights for the existing shareholders. This means that they get the first offer of any new shares being issues, before they can be offered to any third parties. This helps maintain the ownership percentages, as well as prevent unwanted third-party ownership.
  • Company Management: The agreement can address how the company is to be run, with matters like board composition and the procedure for the appointment of directors. Again, this can ensure that there is limited scope for dispute and that the longevity of the Company is always considered.
  • Sale of the Company: Should the Company be put up for sale and/or sold, the Shareholders Agreement can specify how the proceeds will be distributed amongst its members. This is a further protection against any disputes arising, as exit scenarios are common-place for litigation.

 

Why is a Shareholder’s agreement Necessary?

A shareholder’s agreement acts as a safeguard, preventing disputes and preserving trust. Even Companies started with families or friends are not immune to unforeseen circumstances which can strain relationships.

Alongside that, it also provides further protection to shareholders that is not contained within the Articles of Association and wider Company Law.

Lastly, it can mean that as a Company grows and potentially more shareholders are onboarded, everyone is bound by the same rules, ensuring the Companies longevity and original interests of both the shareholders and the Company are protected.

Conclusion

In summary, a shareholder’s agreement is a powerful tool at protecting shareholders interests and ensuring fair treatment throughout. It can also mean that disputes can be resolved and/or avoided.

Commencing the process of a shareholders agreement can seem complex, but our Corporate team at Fisher Jones Greenwood Solicitors is here to help. Get in touch for expert guidance by calling 01206 5435700 or contact us.