Shareholders' Agreements

If you are setting up a limited company with others one of the many things you should consider is a Shareholders' Agreement. This article looks at why you need such an agreement and what such an agreement should contain.

If you decide to enter into a business partnership with someone you would no doubt have a partnership agreement to set out who does what, who is entitled to what and so on. But similar rules apply if you are setting up business with someone as a limited company.

If you’re setting up a limited company with others, you will no doubt all own shares in that company and so it’s best to have an agreement in place to avoid future misunderstandings and problems in running the business.

Shareholders agreements are private arrangements between the shareholders in a company. They deal with the same things often found in partnership agreements. Normally these are:

• What each shareholder brings to the business;
  
  
• How the business will be run;
  
  
• What happens if one of the shareholders leaves for any reason?

Why have formal shareholder agreements?

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Shareholders agreements are used because even the smallest business has to operate under the same company rules as much larger ones.

In many instances, a small limited company is often more like a partnership than a quoted company. Using a shareholders agreement allows the best of both worlds. The company can be run as if it were a partnership with the advantages of limited liability and any other reasons behind forming the company in this way in the first place.

What if we don’t have a shareholders agreement?
In a partnership, all the partners are entitled to a share in management and to know what is going on. In a company - whoever owns 51% of the shares effectively runs the business unless it can be proved they are seriously abusing their power. This means that if for example there are three equal shareholders any two can exclude the third from, say, being a director.
A partner can dissolve a partnership at any time and take out his share of the assets that have been built up. If a shareholder leaves he cannot force anyone to buy his shares. This means if he leaves, dies or is thrown out his capital may be very difficult to get out of the company and the other shareholders can continue using it as an interest free loan forever.

What’s normally in the agreement?

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• Who is to work in the company and on what basis? All the shareholders will usually be entitled to be directors.
  
  
• A list of matters which cannot change unless all the shareholders agree.
  
  
• An agreement to insure shareholders’ lives so that if they die the others have a fund to buy their shares.
  
  
• How to retire in a way that gives the others a chance of buying the retiring shareholder’s shares

Drafting a Shareholders' Agreement

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Shareholders can create a shareholders agreement at any time. It’s best to make a note of all the things the shareholders want to be covered and then take advice. Usually all that is needed is one or two meetings with the company's solicitors to discuss what is needed. A document can then be drafted. It will usually only need minor adjustments before it is ready to be signed.

It’s best to get one done at an early stage as then the chances are that relationships are such that agreement is not too difficult—often not so when a dispute arises. Sensible mechanisms for resolving disputes can be included and often save huge amounts of time and legal costs later.

Contact Cousins Business Law for advice on this topic.

For free advice on this topic please call us on 0845 003 5639.