Why You Need A Shareholders’ Agreement

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Shareholders' Agreement

Launching a startup involves implementing and juggling many administrative duties, from developing products and sales leads to formulating commercial contracts, to managing IT requirements.

If you have chosen to form a limited liability company you will need to register business shareholders. Shareholders can be directors and often are when the business is a start-up.  However, as your business scales up and investors come on board, shareholders often become separate from the director/s. Once there are two or more shareholders, it is essential to have a Shareholders’ Agreement put in place.

This is especially true if shareholders consist of your friends and family, as is often the case in the early stages of a business. A Shareholders’ Agreement written by shareholder disputes solicitors will protect the best interests of the company and its shareholders, as well as demonstrate to potential investors that your business is stable and well-managed.

What is a Shareholder’s Agreement?

A Shareholders’ Agreement, along with the company’s Articles of Association (Articles) set out how the company will be run. A typical Shareholders’ Agreement will include:

  • The types of shares issued by the company.
  • Details of majority and minor shareholders’ rights and responsibilities.
  • Rules relating to the sale and purchase of shares.
  • Principles and policies concerning the running of the company.
  • Protection for minority shareholders including details of their voting rights.
  • Information about dilution rights.
  • Information regarding the payment of dividends.
  • Intellectual property assignment policies and procedures.
  • Confidentiality clauses.
  • A dispute resolution process, including what happens if a deadlock situation arises.

Although you can access Shareholders’ Agreement templates online, it is worth investing in having one drawn up by a Company Law Solicitor. The agreement is a legally binding contract between shareholders, meaning it must be carefully drafted by someone who not only has an excellent knowledge of the law but has also taken the time to understand your company, market sector, and future commercial ambitions.

What are the risks of not having a Shareholders’ Agreement?

Launching and growing a business is incredibly exciting but at times it can be hard work and stressful. Shareholders can quickly fall into disagreements concerning the direction the company is taking, payment of dividends, and/or voting rights. Without a Shareholders’ Agreement governing these and other matters and providing a clear dispute resolution procedure, matters can rapidly escalate. Other risks of not having an agreement in place include:

  • Shareholders who are also employees can retain their shares after they resign or are dismissed.
  • Minority shareholders must rely on statutory rights which can be difficult to enforce. They can also block the sale of the company.
  • With no agreement governing the sale of shares, existing shareholders can transfer their shares to anyone unless prohibited from doing so by the Articles.
  • There is little to prevent shareholders from using or leaking confidential information.
  • Shareholders may not have a clear exit strategy if they want to leave the company.
  • Deadlock situations can result in the company having to be wound up.

Recent events have reminded us that our business and personal lives can change with little warning. Although at this stage of your business’s life things may be running smoothly, problems can suddenly flare up, demanding significant time and resources that should be directed towards business growth. Having a robust Shareholders’ Agreement and Articles in place will ensure the company can continue to run as normal whilst disputes and/or shareholder changes are resolved.

Final words on shareholders agreements

It is natural to want to limit legal costs in your startup’s early stages, however, this can lead to unnecessary future expenses and stress. Disputes and deadlocks can halt the progress of potentially profitable projects and lead to reputational damage. Therefore, it is well worth investing in a comprehensive Shareholders’ Agreement that is tailored to your business.

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