Shareholders agreements – expert advice from James Orpin at Tozers LLPClick here to view the transcript
Put simply, it is an agreement between the shareholders of a Company regulating their relationship and setting out how the Company should be run. The agreement is usually drafted so that it dovetails with the company’s articles of association.
The big question is, do you need one?
If there is more than one shareholder in your company, then it is strongly advisable. Formal contracts are put in place to create certainty and hopefully avoid disputes and costly litigation in the future. For example, if a shareholder in your company acts in a dishonest manner, then there will be no way of forcing them to transfer their shares, unless specific provisions are included within the documentation.
When should you consider putting one in place?
You should investigate the potential benefit of a shareholders agreement whatever stage the company is at. However, the following situations are common triggering factors:
A third party is investing money for a stake in your business (effectively the dragon’s den type scenario). In this case, the investor will want some control over your business to help protect their financial stake; or,
A key employee is issued shares or granted an option for shares to incentivise them and promote their loyalty. In this scenario, provisions should possibly be included which can force them to transfer their shares should they cease to be an employee.
A common question is whether there is a standard form of shareholders agreement.
The short answer is no, each one is drafted specifically for the situation at hand. For example, a situation where two shareholders own an equal number of shares will require a different agreement from where one person holds a majority stake.
However, shareholders agreements do often have provisions in common, such as:
Restrictions on share transfers to control who your fellow shareholders are.
A requirement that the consent of all shareholders is obtained for key strategic decisions and expenditure; and,
Restrictions on shareholders acting in competition with the Company after ceasing to be a shareholder.
This is not an exhaustive list and shareholders agreements and articles of association can be lengthy and technical documents. Every situation requires careful thought, and often professional advice to ensure the documentation is fit for the intended purpose.