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Importance of a shareholders agreement

June 29, 2020, By

We all find ourselves trying to embrace this new normal during this pandemic and for some, this break has allowed your business plans to come to fruition. Due to the speed that businesses move at one of the last considerations on your list as both part of your business plan and commercial spending may be ensuring that you have a shareholders agreement in place, however this document could save you both time, money and stress in the future.

What is a shareholder’s agreement?

A shareholder’s agreement is a document that records how the relationship between the shareholders of a company will work.

The purpose of the document is to protect shareholders, govern the relationship and inner workings and allows the company to have a clear and strong foundation going forward.

Do you really need a shareholder’s agreement?

The short answer is yes. If you are setting up a company with more than one shareholder, we would strongly recommend that you have an agreement in place.

Below are just 5 key reasons why you should consider having a shareholder’s agreement drafted sooner rather than later:

1. Management of the company

Day to day management of the company is usually the role of the directors of the company. However, there may be some decisions that you would prefer to be left for the approval of the shareholders of the company. This would be especially important if the shareholder’s and directors are different individuals.

2. Protection

In the shareholder’s agreement you can provide protection for both minority shareholders and majority shareholders.

One form of protection is in the form of “drag and tag along clauses”. These clauses allow for either the minority shareholder to “tag along” to the majority shareholder in the event of a share sale (so that the majority shareholder can only sell to someone who is willing to buy all the shares in the company).

The other situation is that the majority shareholder can “drag” the minority shareholder’s along with them, so that the majority shareholders would not be held up in a situation where the minority shareholder was unwilling to sell their shares.

3. Disputes

When starting a new company, no one envisages that it could all turn sour, however disputes can be unavoidable sometimes.

Having a shareholder’s agreement in place can help manage any issues and set out a process for how disputes should be resolved.

4. Restrictions

Having a shareholder’s agreement in place is extremely useful when you have shareholder’s that wish to exit the company.

The shareholder’s agreement allows you to place restrictions that apply to exiting shareholder’s such as restricting their ability to set up a competing business. This mechanism is extremely useful in protecting the company’s interest in the future.

5. Flexibility

Shareholder’s agreements also allow for flexibility when it comes to shareholder’s having different classes of shares and in turn different dividend policies.

Briffa are experts in all aspects in commercial law and practice and can assist you with drafting and reviewing shareholder’s agreements to help protect your company and interests.

Please contact us for a free consultation with one of our specialist lawyers on 020 7288 6003 or at [email protected]

Written by Ceyda Sam, Solicitor

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