Shareholders Agreements for Private Limited Companies – Why do you need one?

A ‘Shareholders Agreement’ is one of the most important documents a privately owned company should have.

Such a document will set out the rules, obligations and responsibilities of the shareholders, their relationship with each other and their relationship with the company, in terms of the day to day running of the company and also in terms of longer term considerations.

It is not to say that shareholders of a company should refer to a shareholders agreement on a daily basis to how certain things are done or how certain decisions are made, far from it. The reason for having a shareholders agreement in place is to set out the rules relating to the shares and shareholders in the event that something unexpected or untoward happens to one or more of them.

Putting this framework in place to resolve potential issues/disputes before they happen enables shareholders to work through a process that they have all agreed to, rather than having to decide how matters will be resolved when “the battle lines are drawn” or having to ask a court to decide.

Our advice and experience tells us that issues/disputes take far longer, and end up being more costly, if there is no agreement in place rather than if there is. Some of the main issues that a shareholders agreement can deal with are:

Disputes: Have a structured process to work to in order resolve a dispute, answering the questions “What happens if we don’t agree? There are only two of us and we own the shares 50/50 so how can we resolve a dispute?”

Death/Incapacity: Without an agreement to the contrary, shares may automatically transfer to the spouse of a shareholder on their death. A shareholders agreement can provide for a right of first refusal for the remaining shareholder(s). All parties should also have up to date wills that work alongside and mirror the shareholders agreement and articles of association of the company. Without a shareholders agreement in place, the question of “who gets my shares if I die or cannot work” may not be an easy one to answer, or the answer may well be unsatisfactory.

Divorce: Will your shares automatically transfer to an ex-spouse if you get divorced? Without a shareholders agreement this could be a very real problem and the remaining shareholders could be left with a shareholder who does not have the best interests of the business at heart.

Selling shares: Without a shareholders agreement in place, a shareholder may be able sell their shares to anyone, even a competing company. A shareholders agreement can give shareholders the right of first refusal should any shareholder wish to sell their shares. If nobody takes up this right, the shares can then be offered to third parties, but only ones who are approved by the shareholders. A formula for working out the sale price for shares can also be included in a shareholders agreement. This could be another area for potential conflict and can be easily resolved if a valuation formula already exists.

Finance/Contracts: Who has the authority to spend or borrow money on behalf of the company? Who can enter into contracts on behalf of the company? Without a shareholders agreement in place any shareholder could make such commitments on behalf of the company without agreeing this with the other shareholders.

General: The contents of a shareholders agreement will be different for every company and are necessary whether it is a new company or one that has been established for many years. Each agreement needs to be bespoke and tailored to the needs of the parties involved.

If you would like to discuss this in more detail, without obligation, please contact our Corporate & Commercial team on 01283 526220.

Share This

Copy Link to Clipboard