Small Business Advice

What is a Shareholders’ Agreement, and why do you need one?

21 Nov 2017

A shareholders’ agreement can be likened to a seatbelt, you will never realise how much you need one until something goes terribly wrong.

At Accounts & Legal, we want to help protect your rights and finances, as we have been trusted to do for so many other shareholders in the past.

Get in touch with our team today to see how we can help you, or try our Interactive Instant Quote tool and one of our experts will be in touch shortly.

 

Who needs a shareholders' agreement?

While shareholders may not have a huge number rights, the rights they do have are important – namely their ability to appoint or remove a director.

Among shareholders, company law rules generally indicate the will of a majority shareholder will prevail as they have the greatest share of voting rights. A minority shareholder only has limited power to block a majority shareholder’s decision.

Shareholders of some companies may want to vary the standard rules. The following are circumstances in which one can expect to see that happen.

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Quasi-partnerships

Companies are often set up on the understanding that, irrespective of their shareholdings, the shareholders will have a relationship akin to that of partners in a partnership - an equal say in how the company is run and how it develops, equal access to company information, and an equal share in the company's success.

A shareholders' agreement can be used to vary the usual company law rules and create equality among shareholders of all levels.

 

Investors with a minority stake

An outside investor, such as a venture capital firm or a business angel, may be prepared to provide working capital to fund growth in your company in return for a minority shareholding.

To protect the returns from, and value of, their investment, they will want more than the usual company law protections for minority shareholders.

A shareholders' agreement can be used to vary the usual rules and protect the outside investor.

 

Joint venture companies

In the event that two businesses set up a company to carry on a joint venture, each business takes half the share capital in the joint venture company, and each has the right to appoint half the board.

They usually want to vary the usual company law rules so that neither investor can make any decision at either shareholder or board level without the consent of the other.

A shareholders' agreement can be used to create the required deadlock.

 

Life without a shareholders' agreement

Many of the circumstances catered for in a shareholders' agreement will arise when your business relationship has been strained or destroyed, so anticipating them now can save you significant time and money if they occur.

Your discussions can also highlight areas where your expectations are not as similar to your partners' as you thought.

With your legal advisers helping to smooth negotiations, and making sure issues are raised and dealt with constructively, a shareholders' agreement can be a worthwhile investment now, as well as valuable insurance for the future.

 

What a shareholders' agreement covers:

 

Positive obligations

Many clauses in a shareholders' agreement operate as voting agreements - the parties bind themselves to exercise their votes as shareholders to put into effect their agreed intentions as to how the business will be funded, run and developed.

 

Rights of veto

Other parts of the agreement often provide that important decisions, whether or not they would ordinarily be taken by the directors or the shareholders, cannot be made unless all shareholders agree to them - so minority shareholders can veto them.

 

Issue and transfer of shares

A shareholders' agreement will often make specific provision for the procedure on issue and transfer of shares.

On issue of shares, these provisions must balance the need for the company to be able to issue shares to raise further funds against the danger of a shareholder finding their shareholding has been diluted by an issue to other shareholders.

On a proposed transfer of shares, they must balance the value to shareholders of having a market for their shares if they want to sell them (or if they die and their estate wants to sell them), against the danger of other shareholders building up a larger shareholding than they previously held, or new, 'undesirable' shareholders being admitted.

 

Rights to appoint directors

Shareholder agreements to protect outside investors may provide that they can appoint a director to the board of your company, to protect their interests.

A venture capitalist, for example, may appoint a non-executive director, who takes little part in day-to-day management unless the company is not providing the promised return.

A business angel may insist on being appointed to the board in person, and may play an active (and valuable) part.

 

Dispute resolution

Agreements usually contain a mechanism for resolving disputes, such as referral to a third party expert or arbitrator, or a buy-out mechanism whereby, if a dispute occurs, one side buys out the shares of the other at a price determined in accordance with the agreement.

It can even provide that, in the event of an unresolved dispute the parties agree to vote to wind the company up.

 

Shareholders' agreements, articles of association and other documents

To learn more about shareholders’ agreements and integrating them into your business, get in touch with the Accounts & Legal team today. Alternatively, try our free Instant Quote tool and one of our experts will be in touch with you shortly. 

Keir Wright-Whyte

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Managing Director

0207 043 4000

About the author

Originally graduating with a degree in geography from Edinburgh University, Keir claims that he was then tricked into becoming an accountant by one of the UK's top 5 accountancy practices.The deception extended to the usual training in audit and associated activities.

Keir subsequently worked in a number of advisory roles with clients including in the energy trading, pharmaceuticals and financial services sectors.

He loves working at Accounts & Legal because of the variety of work and clients, the excellent team ethos and morale, the importance placed on genuinely helping and being useful for clients and because he believes what he does matters to clients and helps the firm.

Keir's primary role is to ensure that new clients with complex businesses or needs are on-boarded in the best way and he is a "trouble shooter" both for clients and where complex issues arise internally. He also helps the accounting teams strive to improve what we do for clients, whether processes or services.

When not debiting or crediting, Keir has a penchant for fixing old buildings, skiing, surfing and cycling.

  

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