When to sign a Shareholders’ Agreement

When your company issues shares to more than one person, a shareholders’ agreement can set out in detail the rights and responsibilities by which the shareholders will be bound. You should consider the following points when deciding whether to enter into a shareholders’ agreement when issuing shares.
 

1. The level of detail


A shareholders’ agreement will contain far more detail than the company’s standard Articles of Association. And unlike the Articles, it will not be filed at Companies House and so can remain a confidential document. It can be tailored to the exact requirements of your company. While it may take a while to draw up an agreement that is acceptable to all parties, it is worth putting in the time at this stage to make sure everyone is happy, rather than find later on that misunderstandings or disagreements arise.
 

2. Restrictive covenants


If you want to bind your shareholders, for example to keep company matters confidential or to stop them dealing with competitors, the agreement can include clauses to cover that.
 

3. Framework for important decisions


This is an opportunity to set out in detail who, out of the directors and shareholders, has a say in the company’s big decisions. While the directors will want the ability to run the company without having to ask the shareholders, there are some matters, such as directors’ pay and appointment, where shareholders will want their opinion heard. An agreement can give shareholders voting rights and a right of veto.
 

4. Protection for minority shareholders


In return for investing in the company, minority shareholders will want their rights protected. The document can stop the company from simply issuing extra shares, thereby diluting the existing holdings. It can also contain detail of permitted sale of shares and/or sale of the company.

If the majority shareholders intend to sell up, the shareholders’ agreement can include a clause requiring them to include minority shareholders in any deal. This stops those with a lesser holding from ending up in a company under different ownership.
 

5 Protection for majority shareholders


Where a future sale of the company is possible, a shareholders’ agreement can force minority shareholders to go along with the sale. The advantage of this is that it makes the company more attractive to buyers, who are likely to want to buy all of the shares, rather than inherit a number of small shareholders along with the business.
 

6. Dispute resolution


Where a future sale of the company is possible, a shareholders’ agreement can force minority shareholders to go along with the sale. The advantage of this is that it makes the company more attractive to buyers, who are likely to want to buy all of the shares, rather than inherit a number of small shareholders along with the business.
 

7. Control of share transfer


Even after issuing shares, you will still want a certain degree of control over them, for example to stop them being sold to third parties. A shareholders’ agreement can give existing directors the right of first refusal for the purchase of unwanted shares.
 

8. Control of leavers’ shares


Where a future sale of the company is possible, a shareholders’ agreement can force minority shareholders to go along with the sale. The advantage of this is that it makes the company more attractive to buyers, who are likely to want to buy all of the shares, rather than inherit a number of small shareholders along with the business.
 

Do I need a shareholders’ agreement?


Every company that issues shares should really have a properly drafted shareholders’ agreement, covering all eventualities, giving certainty and assurance to both directors and shareholders. It will run in tandem with the company’s Articles of Association, but will include far more detail. More rights and protections can be included and while the Articles can be amended by 75% of shareholders, 100% agreement is needed to change a shareholders’ agreement.
 

Need help from an expert shareholders’ agreement lawyer?


Submit your enquiry to Lexoo and get quotes from expert shareholders’ agreement lawyers who can help draft your agreement or help with any related issues.
 

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