Is a shareholders’ agreement important for a newly formed company?
Once the initial hurdle of successfully incorporating a new company has been dealt with, one of the first things to think about when starting a new company is whether you need an agreement in place to govern the way that the business between the shareholders is conducted i.e. a shareholders’ agreement.
A shareholders’ agreement is the first proactive and preventative step you can take to help protect your new company from unforeseen issues that may arise between the shareholders in the future. So, if your company has two or more shareholders, getting an agreement in place early is key.
Unlike a company’s articles of association, a shareholders’ agreement is a private document that does not need to be filed at Companies House. It will set out the rights, responsibilities, liabilities and obligations of each of the shareholders and documents how the business should be run.
Key areas that are often dealt in a Shareholders’ Agreement include:
- What matters require decision-making by the shareholders
Whilst the directors of the company are responsible for making the day-to-day management decisions, there may be some important issues (such as changing the articles of association of the company, changing the nature of the business etc.) that you may want to be decided upon by the shareholders (so-called “Reserved Matters”).
- What happens if a shareholder wants to leave, becomes bankrupt or passes away
A shareholders’ agreement allows you to cater for the above scenarios and could put in place a mechanism by which the departing shareholder has to offer their shares to the remaining shareholders in the first instance before offering them to others. If a shareholder wants to leave, a shareholders’ agreement could also put in place restrictions on what that shareholder can do once they are no longer a shareholder (e.g. preventing them from being involved with a competing business). This ultimately works to preserve the value of the company.
- What happens if there is a deadlock
A shareholders’ agreement can cater for situations where there is a disagreement at the board and at shareholder level (i.e. a “Deadlock”). There are many ways in which a Deadlock can be broken and so it should be carefully considered whether a Deadlock may arise and how to get out of it, so that the company can move forward / shareholders can part ways effectively.
- What happens if a shareholder wants to sell the company
A shareholders’ agreement will typically include “drag” (where the majority shareholders can compel the minority shareholders to accept a deal to buy all of the shares of the company) or “tag” (if the majority shareholders receive an offer for their shares, the minority shareholders can force them to procure that the offer is also extended to them) provisions.
- What happens on issue of new shares
Often, a shareholders’ agreement will put in place protection for existing shareholders such that, if it is intended that further shares in the capital of the company be issued, they must first be offered to the existing shareholders so that they are not diluted.
It is clear from the above that the primary aim of any shareholders’ agreement is to protect the shareholders and the company so should be one of the most important legal documents that you enter into in the early days of your new company.
Find out more about shareholders and shareholders’ agreements by watching a recent video made by Startacus featuring Corporate Partner, James Donnelly or get in touch with our Corporate team.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.