WHY YOUR COMPANY NEEDS A SHAREHOLDERS AGREEMENT
If things go wrong, close family and friends entering into business together have a lot to lose
A Shareholders Agreement contains a set of tailor made private rules that bind the shareholders and the company to act in a way that all parties have agreed to.
Many smaller companies, where shareholders are family members or close friends, mistakenly believe that they do not need a Shareholders Agreement. Shareholders in these companies believe that as they are working with close family or friends, issues won’t arise (what I like to call "The 'She’ll be Right' Delusion"!) and therefore they don’t need to go to the additional expense of having a solicitor prepare a Shareholders Agreement.
We often find in practice that it is these companies who most benefit from a Shareholders Agreement. A Shareholders Agreement can keep individual expectations in check and provide a clear road map that everyone must follow. If things go wrong, close family and friends entering into business together have far more to lose (from a relationship perspective) than larger companies where the shareholders are merely business partners.
What is a Shareholders Agreement?
A Shareholders Agreement is essentially a set of rules which the shareholders of a company must follow. A Shareholders Agreement sets out the rights and obligations of the shareholders and outlines the rules, processes and framework for dealing with matters that may arise in the day to day running of the company (such as disputes).
What is included in a Shareholders Agreement?
Shareholders Agreements generally deal with the following matters:
• The company structure
• How directors are appointed
• The management of the company
• The company’s capital, funding and distribution policy
• The transfer of shares
• An exit strategy
• Dispute resolution
• Restraint of trade provisions
Shareholders Agreement vs Company Constitution
All companies must have a constitution. A company will either rely on the default constitution provisions contained in the Companies Act 1993 or on the provisions of a tailor made constitution registered at the Companies Office.
Both a Shareholders Agreement and a constitution set out the rules for running the company; but they are both very different.
The most notable difference between a Shareholders Agreement and a constitution is that a company’s constitution is a public document (it is registered at the Companies Office and can be viewed by anybody). A Shareholders Agreement on the other hand is a private document between the shareholders and the company. The advantage of a Shareholders Agreement is that shareholders can keep sensitive arrangements between shareholders confidential.
Another advantage of a Shareholders Agreement is that, commonly, its terms can only be amended with the approval of all shareholders; in contrast, a company constitution may be altered by a majority (75%) of the shareholders. This means that shareholders who enter into a Shareholders Agreement can ensure important matters to do with the running of the company cannot be changed without unanimous approval.
A Shareholders Agreement, in contrast to the default provisions in the Companies Act 1993, can provide clear guidance for a Shareholder wishing to sell his shares and exit from the company. Without a clear set of guidelines set out in a Shareholders Agreement, issues may arise between exiting and remaining shareholders. Even if a tailor made constitution includes provisions regarding exiting shareholders, it is unlikely that those provisions would be anything more than general in nature. A Shareholders Agreement can include far greater detail and clarify.
How Billings Lawyers can help you
• We can review your existing Shareholders Agreement to ensure it is clear, up to date, and treats all shareholders fairly.
• We can prepare a tailor made Shareholders Agreement for your company and its shareholders.
• We can prepare a constitution for your company.
• As your trusted advisors, we can provide you with general business advice and legal advice on all aspects of your business including employment and intellectual property law.
If you would like more information regarding Shareholders Agreements, company constitutions or general business advice please contact us.
The content of this article is necessarily general and readers should seek specific advice on particular matters and not rely solely on this article.