The Importance of Shareholder Agreements

by | Feb 4, 2020 | For Clients

It’s fair to say that we work in an industry that is used to giving advice to others; typically, this advice extends to making sure clients are aware that important documentation such as Wills, Trusts etc are kept in good order.

However, when it comes to having own company affairs in order, there is one important event that is often overlooked and that involves the setting up or maintaining of a shareholder agreement.

Unlike the articles of association which are a matter of public record, there is no legal requirement for a shareholder’s agreement and in my experience, discussions surrounding the setting up of one often commence but stall as soon as a stumbling block is reached and an often awkward conversation is put off and the agreement forgotten about.
 

Of course, when you start or join a business, no one wants to think about it ending, everyone is friends and looking forward to the prosperity of the company. Overtime things can change, people fallout which can result in a” Business divorce” or simply the time comes for someone to move on. Shareholders agreements can provide vital protection detailing ” What happens if” and as such are essential documents to have, their importance cannot be over-emphasised.

 

When dealing with mergers and acquisitions or business divorces, we often encounter problems caused by the lack of a shareholder agreement and can testify to how complex and time consuming matters can become when shareholders cannot agree on a course of action and a state of “Deadlock” exists”

The main benefit of setting up an agreement is that the shareholders have agreed and documented their intentions on how they will work together as shareholders of the Company. Agreements can be structured in many ways and could include key decisions such as:, how shares can be sold, who shares could be sold to, what happens if a shareholder dies, how disputes about rights over the company assets would be dealt with and what action would be taken if a shareholder acts in manner contravening the agreement.

You could also include details stating if a shareholder could work in competition, if they left the business, rather than relying on settling this in a compromise agreement on employment termination.

It’s worth mentioning that disputes are more common in smaller companies where shareholders and directors work in the business and sometimes the shares are not owned on an equal basis.

 

We believe the setting up of a shareholder’s agreement is a sensible course of action and we as a company have a good deal of experience in providing guidance as to what an agreement should contain.

Whilst we do not actually draw up such agreements, we have contacts with many legal advisers who are also experts in Financial Services and would be willing to make an introduction to them if you would like and it seems relevant to do so.

If you would like an informal chat about this or any other business matter, please feel free to give me call, we’d be delighted to help if we can.