Five Reasons to Have A Shareholders Agreement

Five Reasons to Have A Shareholders Agreement

We work with many companies in putting together Joint Ventures and setting up businesses where there is more than one shareholder.  Unfortunately, we also spend a moderate amount of time assisting shareholders who have fallen out with each other.  Where shareholders fall out the position is made substantially more complicated, and expensive to resolve, when a Shareholder Agreement is not in place. We set out below five key reasons why you should consider putting in place a Shareholders Agreement for your business.

1. Shareholders Sometimes Fall Out

When a business launches, the shareholders are almost always in alignment with each other.  The enthusiasm for taking a new business venture forward very often means that the shareholders will not give any consideration to what might happen if they fall out with each other and stop agreeing with one another. 

Where a company is owned 50/50 between two shareholders, if they stop agreeing with each other the company can very quickly find itself in a deadlock situation.  In such circumstances the business of the company can quickly grind to a halt.  A Shareholders Agreement assists by providing a pre-agreed mechanism for resolving any such deadlock. 

Where you have more than two shareholders, it is sometimes the case that multiple shareholders gang up against a minority shareholder and take decisions that they do not agree with. A Shareholders Agreement can protect all parties by ensuring that certain key decisions can only be carried through with unanimous consent. 

2. Protection for Minority Shareholders

Any shareholder that owns 51% or more of the company essentially has control of that company. Subject to certain limitations that are set out in the Companies Act 2006, that shareholder can essentially run the company as they see fit.  A Shareholders Agreement can protect against this by requiring that all parties must agree on certain matters which otherwise may be prejudicial to one or more of the minority shareholders. 

3. Business Direction

A Shareholders Agreement is an opportunity for the shareholders to set out how the business will be run and what each shareholder will be responsible for within the business. Setting out this type of matter at the outset ensures that shareholders share a clear and documented vision as to how the company will progress and what is expected from each of them.

4. Controlling the Transfer Of Shares

Without a Shareholder Agreement a shareholder will not be restricted in relation to how they may transfer their shares.  A shareholder may not be happy with the prospect that their fellow shareholder could transfer their shares to any third party.  A Shareholders Agreement can ensure that all shareholders benefit from a right of first refusal.

5. Resolving Disputes

Where a dispute does arise within the company, there is no default mechanism for resolving that dispute. Very often, where shareholders reach a stalemate or fall out, the matter will be referred to a Solicitor.  Legal proceedings can become expensive and generally will lead to a division between the shareholders increasing.  A Shareholder Agreement is a great opportunity to put in place a procedure for Alternative Dispute Resolution.  This can be Mediation or Arbitration.  Either way the mechanism usually acts to assist in getting the shareholders to find common ground.

The above are just five of the key reasons why we recommend that all companies that are owned by one or more shareholders put in place a Shareholders Agreement. 

Here at GoodyBurrett our team has over four decades of experience in advising companies and shareholders.  If you think that your company would benefit from putting in place a Shareholders Agreement, please get in touch for a no obligation discussion with either Stephen Avila or David Cammack from our business team.