Whilst there is no legal obligation to utilise a Shareholders Agreement, their importance to the effective running of a company cannot be overestimated.
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What Is A Shareholders Agreement?
A Shareholders Agreement is a legally binding contract between a company’s shareholders. It regulates their relationship and influences the way in which the company is run.
Since all companies are different, so too are the appropriate terms that should be included in a Shareholders Agreement. However, most follow a similar format and usually address the same matters. Common issues that are often dealt with by way of Shareholders Agreement include the following:
- Reserved matters –most day-to-day decisions regarding a company’s business operations are taken by the directors, with the shareholders having little input. A Shareholders Agreement can be used to redress the balance by detailing specific acts that cannot be taken without the shareholders’ approval. What are reserved matters in a Shareholders Agreement will depend on the circumstances, but examples include any significant capital expenditure and entering into joint ventures or partnerships.
- Drag-along and tag-along rights – these rights are intended to safeguard the respective rights of both minority and majority shareholders. Drag-along rights operate in favour of majority shareholders, enabling them to compel minority shareholders to consent to a sale of the company. Tag-along rights, on the other hand, protect minority shareholders. If a Shareholders Agreement includes tag-along rights, then should a majority shareholder seek to sell their shares, the minority shareholders can ‘tag along’ and benefit from the same price and terms for their own shares.
- Dispute resolution – this type of clause is vital in any Shareholders Agreement. Its provisions set out a framework for the resolution of any dispute that arises between the shareholders. Often, the clause will provide that the parties must attempt to settle their dispute through mediation in the first instance. Mediation is commonly used in business disputes, with excellent results. It enables the parties to explore a commercially sensible settlement and often preserves their ongoing working relationship, despite their disagreement.
- Confidentiality and non-disclosure – a Shareholders Agreement will usually permit shareholders to access sensitive company information but impose restrictions on them disclosing or using that information for personal gain or to the detriment of the company. Confidentiality obligations often extend beyond the termination of the Shareholders Agreement.
- Pre-emption rights and rights of first refusal – these clauses give existing shareholders the right to buy any additional shares that may be introduced, or the existing shares of a shareholder who wishes to sell.
Who Should Enter Into A Shareholders Agreement?
It is not obligatory for any shareholder to enter into a Shareholders Agreement. However, in most cases it is in the shareholder’s best interests to do so, to ensure their position is fully protected. When new shareholders join a company, they can be asked to agree to any pre-existing Shareholders Agreement by entering into a deed of adherence.
Why Should You Have A Shareholders Agreement?
Shareholders Agreements have numerous benefits, both for the individuals who are party to them and the company overall. Some of the key advantages include the following:
- Minority Shareholder Protection – matters such as tag-along rights provide essential protection for minority shareholders.
- Regulating the management of the company – since the shareholders do not have day to day control of the company’s affairs, a Shareholders Agreement provides a mechanism through which certain decisions of particular significance are reserved to them.
- Promoting business stability – proactively considering how the company should be run, pre-empting any areas of difficulty and potential disputes, and addressing such matters in a Shareholders Agreement can go a long way towards ensuring the stability of the company. This, in turn, can make the business a more attractive prospect for banks and other investors.
- Resolving deadlock – a deadlock situation can be disastrous for a company and, in worst-case scenarios, can result in the company being wound up or liquidated if a resolution cannot be found. Deadlock clauses set out a mechanism through which such disagreements are to be dealt with.
What Happens If You Don’t Have A Shareholders Agreement?
If you don’t have a Shareholders Agreement, your business will likely run well enough, until something happens that threatens to derail it. Then, with no agreement in place to address the issue or resolve the dispute, the continued success of the company may be compromised. Some potential consequences of not having a Shareholders Agreement in place include the following:
- Majority shareholders may be unable to sell the business if the sale is blocked by minority shareholders.
- Deadlock that cannot be resolved.
- Shareholders may leave and use the company’s commercially sensitive information to set up a competing business.
- A dispute may arise, and, with no framework in place for its resolution, could cause considerable disruption to the company.
Summary
Business owners are often incredibly busy and non-essential matters such as Shareholders Agreements can be placed on the backburner. However, prevention is always better than cure, and prioritising the implementation of an effective Shareholders Agreement can save you considerable time and money in the future. Specialist commercial solicitors will usually do most of the work for you, identifying the clauses of relevance to your business and preparing an agreement that accurately mirrors your intentions and meets your requirements.
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