Why have a Shareholder Agreement?

A shareholder agreement will often be an essential document within a registered company. This document may not be required when you first register your business if you are the sole shareholder, however, as soon as there is more than one shareholder, it is in the best interest of all companies to have a shareholder agreement in place.

Often, particularly when the shareholders of a company are comprised of family members or friends, it may seem that a shareholder agreement is unnecessary. However, this means that, should a conflict arise between the members, there will be no clarity or set procedure to resolve any issues. Consequently, it is advised to have a shareholder agreement in place before any potentially costly conflict does arise. This document will set out the procedures and terms for fair decision making within the company and thus will reduce the likelihood of internal uncertainty and potential conflict, whilst also providing solutions for difficult situations such as:

• a voting deadlock
• failure by the parties to comply with their obligations
• issue of new shares or sale of shares
• dividend policy

Furthermore, even if no conflict arises, a shareholder agreement will still provide certainty as to the roles of the shareholders within the company, and the inception of one will ensure that these things are fully considered and well thought out. It will specify the duties of the individuals involved both to the business and to each other as well as outlining the powers and rights they have within the business in return for their capital investment.

Shareholder agreements also give the added benefit that they can include terms to provide greater protection for shareholders than would be included in other company documents such as the articles of association. This will be of particular benefit where there are several shareholders within a company, some or all of which may individually be a minority shareholder. The agreement could contain clauses to protect the interests of minority shareholders in the event of the sale of a majority shareholding or a change of control within the company.

They also give further protection to the interests of minority shareholders as the shareholder agreement itself can only be altered with the consent of all of the shareholders, meanwhile alteration to the company’s articles of association can be done with a 75% majority. This means that the articles may be altered to place minority shareholders in a disadvantageous position with regard to their rights and obligations, meanwhile this cannot be done where these rights are cemented within a shareholder agreement.

The existence of a shareholder agreement shows stability within the company and can therefore also make the company more attractive to potential investors, future shareholders and other businesses.

For advice on all company documents such as shareholder agreements please do not hesitate to contact Phil Crawley on 01302 965354.