A Brief Introduction to Shareholders Agreements.
A shareholder agreement is a contract between you and any other parties who own shares in your company. The purpose of the agreement is to regulate and clarify how people may enter and exit the company as shareholders, how disputes are managed, how shareholders are compensated. Shareholders Agreements allow the owners of a business to take control over how it is run. They provide certainty and consistency within the business by setting out a framework of rules, responsibilities and procedures.
Why a shareholders agreement needs to be written by a qualified legal team rather than using a shareholders agreement template.
Because a shareholder agreement is, essentially, a contract, it’s wise to instruct a qualified lawyer who will understand the terms required in a legally binding contract. It’s important to get this document correct from the onset and a lawyer can help guide you through that process efficiently and effectively.
There are shareholder agreement templates readily available from various Internet sites. Like the temptation of downloadable wills, this route can seem like a cheaper alternative to instructing a solicitor. However, as with contracts you should remember that your business is unique and the generalised terms of a downloadable document may not be the best option and may serve you very badly further down the line.
It’s the detail within the shareholder agreement that matters. Different industries have different regulations and different shareholders will have specific and varied responsibilities that need to be reflected accurately. It’s like any other job really. If you get on to a plane you don’t expect to be able to fly it. If you need surgery you would not think to start instructing the surgeon. Legal terminology is not always straightforward.
The document is the equivalent of an insurance policy. If you choose to take what looks like a shortcut to save a bit of money at the outset, you may find yourself flailing around should a major dispute or issue occur further down the track.
A shareholders agreement can be changed in the future as required. Where this is required a change can be made as long as all of the shareholders consent to the amendment. This can happen if you are adding or removing shareholders, changing the amount of shares or dividend policies. You can make an amendment by adding a schedule to the document, agreeing special conditions via email or changing the document itself, however if you are amending the document itself it is a good idea to instruct a solicitor to undertake the change or at least review the document afterwards.
The final point is that professionally drafted legal documents will help you withstand any due diligence when looking for new investors, trying to sell your business on or dealing with financial institutions. There tends to be a great deal of caution in this area.
Why do you need a Shareholders Agreement?
As touched on already, it is wise to prepare for all situations, even in the best of times. Recent events connected to Covid-19 show us what can occur out of the blue. It’s much easier to draft a Shareholders Agreement when you are not under pressure or an unforeseen situation has developed.
Shareholders are individuals and individuals sometimes fall out. They also have their own private lives and families and so are subject to pressures and events outside the sphere of the business itself. These can affect the way the business is run if their situation changes and sometimes those changes are rapid and unexpected.
When we refer to worst-case scenarios, then there are a range of situations you need to consider. What happens if a shareholder dies? What are the provisions to deal with the share of the business? If a shareholder goes through a divorce and is required to provide their former spouse half of their assets, what do you have in place to ensure you don’t end up with an unwelcome and sometimes hostile shareholder? These are the sort of scenarios a shareholder agreement protects you and your company from.
What should a shareholder’s agreement include?
There are not any one-size fits all list of provisions that a Shareholders Agreement should include. No one business is like another. However there are typical areas that are usually considered for inclusion. These can include:
- Dispute resolution procedures.
- The frequency at which board meetings are required to take place.
- Agreed procedures and methods of taking decisions.
- The procedure to follow and the steps to be taken where no decision can be reached on a particular matter.
- How a new shareholder is able to become a part of the company.
- Restrictive covenants for existing shareholders.
- Sale of the business.
- The correct process for the buying and selling of shares.
- Roles and responsibilities.
- The rights of individual shareholders to receive profits and/or dividends.
- Measures to protect the interests of minority shareholders.
- The extent of the powers of any non- shareholding company directors.
- Arrangements in connection with an outgoing shareholder.
- And last but not least the core question of who has control?
Is a shareholders agreement legally binding?
A shareholders agreement is basically a contract, so in the same way that a contract is legally binding once it is signed; once a shareholders agreement has been signed it will be legally binding.
The same four aspects of a viable contract are important with shareholders agreements as well. These are offer, acceptance, consideration and an intention to create legal relations. Remember that some consideration must be made. This is usually covered through the price that is paid for the shares. A value must be placed on the shares within the agreement.
Need Assistance or Legal Advice?
If you have any further questions about Shareholders Agreements FAQs, rhw solicitors have a commercial law team with a vast amount of experience and know-how and we are able to advise and assist in all aspects of contractual agreements including the creation of new contracts and amendment of current agreements.