Shareholder Agreements – A Guide To Why You Need One

But we all get on? Why do we need a Shareholders Agreement?

Whether friends, family…or frenemies…when you go into business with someone the dynamics and responsibilities change. Your relationship changes from just the personal to personal and business and you become accountable to one another for more than just your friendship.

Why do a Shareholders Agreement?

A Shareholders Agreement is there to set the boundaries and establish guidelines on how your business relationship and commitments are going to work. Putting one in place can help you avoid significant fallouts and deadlocks. Not doing one can leave you exposed in an unreconcilable dispute…and often leads to the end of what was once a great friendship!

What is in a Shareholders Agreement

A Shareholders Agreement is a private contract between the individual shareholders and the Company. It can, and should, be tailored to you and your business needs. However, a Shareholders Agreement would typically include:-

1) A good faith provision – this is a clause where each person agrees to act in good faith towards one another. Whilst you may think that this goes without saying, you would be amazed at the number of times we receive enquiries where one party has done something the other considers unconscionable.

2) Restricted decision making – the Companies Act 2006 only requires certain decisions which primarily relate to the Company’s constitution to require shareholder consent. Subject to these few decisions, without a private agreement decision making is generally vested in the directors and although decisions should be made at a board meeting…it’s not uncommon for certain decisions or practices to fall outside of board level. Inclusion of a ‘decision making’ clause will establish some contractual boundaries on decisions that would require a majority, or unanimous, shareholder consent. This includes, for example, borrowing or lending money, charging company assets, incurring significant capital expenditure, hiring key employees (to name a few) which are not restricted by the Act.

3) Pre-emption rights on transfers – this clause is crucial. Many people don’t appreciate that shares are an asset and therefore it is open to anyone to sell that asset at their discretion. This can lead to rather unfortunate consequences where you are not in business with the person that you thought you were! Whilst this can happen voluntarily, it typically happens in the event of death, bankruptcy or incapacity. Including pre-emption rights can address this by requiring the shareholders to offer shares to one another first and giving the ‘unaffected’ shareholder a right to buy shares in the event that certain unfortunate circumstances occur. Otherwise, you may end up working with a competitor…a grieving widow…or Cousin John you never met!

4) Deadlock – as alluded to above one of the biggest issues arises when shareholders fall out and there is no resolution mechanism. This can be particularly problematic when there is just the two of you in business. Pre-agreeing what procedure you will follow to resolve a dispute can be key in actually resolving it rather than just falling out.

How much will it cost?

As Shareholders Agreements should be amended to your needs, the quote for them also needs to reflect the work that will actually be involved in working with you and preparing one. This will include time for discussing your business and getting an understanding of how you work, advising on relevant and suitable clauses and then drafting the agreement itself and advising you on its contents. This will vary from client to client therefore I always look to provide an accurate estimate specific to your circumstances. What I would say though…is that paying for a Shareholders Agreement is typically far cheaper than engaging in litigation or dispute resolution if you fall out!

How long will it take?

The time it will take is up to you. We have the expertise to discuss and produce Shareholders Agreements swiftly. However, I appreciate that you don’t deal with these types of agreements daily (after all, that’s our job!) therefore it will also take time for you to review the documents, ask us any questions and get comfortable with them before proceeding.

I want to discuss this more, who do I contact?

If you want to know more about Shareholders Agreements or other rights, obligations and responsibilities that you may have as Shareholders or Directors do reach out to myself (hthrelfall@wilsonbrowne.co.uk) or any member of the Corporate & Commercial Team who would be happy to help.