Why a Shareholders' Agreement Matters Before You Need It

Many businesses begin with enthusiasm, trust and a shared vision, whether it's two founders launching a new venture or several investors backing an established company. Everyone is usually focused on growing the business rather than planning for disagreements.

‍

The difficulty is that businesses evolve. New opportunities arise, circumstances change, shareholders retire, relationships break down or one person simply wants to move on.

‍

A shareholders' agreement is designed to deal with these situations before they become problems, providing a clear framework that everyone has already agreed, rather than leaving shareholders to negotiate difficult issues in the middle of a dispute.

‍

What is a shareholders' agreement?

‍

A shareholders' agreement is a private contract between the shareholders of a company. It sits alongside the company's Articles of Association but serves a different purpose. While the Articles provide the constitutional framework required for the company to operate, a shareholders' agreement allows shareholders to agree more detailed arrangements that reflect the specific needs of their business.

‍

Typically, it deals with how important decisions are made, the rights and responsibilities of shareholders, how shares can be transferred and what happens if a shareholder wishes to leave. For businesses with more than one shareholder, it provides certainty from the outset.

‍

Preventing disputes before they arise

‍

One of the greatest benefits of a shareholders' agreement is that it encourages difficult conversations before they become difficult situations. When relationships are positive, shareholders are generally able to agree sensible arrangements that are fair to everyone. Waiting until disagreements develop often makes those discussions far more challenging.

‍

A well-drafted agreement can help prevent disputes by setting clear expectations, protecting minority shareholders and establishing how significant business decisions should be made.

‍

What should the agreement cover?

‍

Every business is different, so every agreement should reflect the company's particular circumstances, but several provisions commonly prove invaluable.

‍

Many agreements identify "reserved matters" that cannot be decided without shareholder approval, such as taking on significant borrowing, issuing new shares, changing the nature of the business or selling substantial assets. Other common provisions deal with dividend policies, voting rights, director appointments and the responsibilities of individual shareholders. Documenting these arrangements in advance reduces uncertainty and makes decision-making more transparent.

‍

Planning for changes in ownership

‍

Shareholders rarely remain involved in a business forever. Someone may wish to retire, pursue a different opportunity or sell their investment, and without appropriate safeguards, shares could potentially be sold to someone the remaining shareholders have never met.

‍

For this reason, shareholders' agreements often include detailed rules governing how shares may be transferred. Pre-emption rights commonly require a shareholder who wishes to sell to first offer their shares to existing shareholders before approaching an outside buyer. Drag-along rights can allow majority shareholders to require minority shareholders to participate in a company sale, while tag-along rights protect minority shareholders by allowing them to sell on the same terms if the majority disposes of its shares.

‍

What if shareholders cannot agree?

‍

Differences of opinion about investment, recruitment, expansion or the future direction of the company are not unusual. Many agreements include procedures requiring negotiation or mediation before formal legal action is considered, and some contain deadlock provisions for situations where shareholders cannot reach agreement on significant issues, allowing one shareholder to buy out another or providing another agreed method of resolving the impasse. Having these procedures in place can often prevent disputes from escalating into costly litigation.

‍

A shareholders' agreement is most effective when prepared at the beginning of the business relationship, while everyone shares the same objectives. At Marsons Solicitors, we advise businesses and shareholders on drafting, reviewing and updating shareholders' agreements, and assist with shareholder disputes, ownership changes and succession planning, helping businesses put clear legal frameworks in place before problems arise.

‍