Although there is no legal requirement to have a Shareholders’ Agreement (‘SHA’), shareholders are often advised to have an agreement when starting a company with more than one shareholder. An SHA is an agreement between all or some of a company’s shareholders defining the parties’ rights and duties and how they will reach certain decisions.
The following are some of the important reasons why your company should have an SHA in place:
When a company is incorporated, the Articles of Association of the company are filed at Companies House, and therefore, any member of the public is able to view the contents at any time. An SHA works in conjunction with the company’s Articles. However, unlike the Articles, an SHA is a private contract and confidential between the parties. This enables parties to keep detailed provisions about shareholders’ rights and duties and the company’s decision-making mechanisms private.
- Dispute between the Shareholders
It is very often that shareholders do not, at the outset, think about the potential conflicts that can arise between them and how to manage or resolve them. Unfortunately, disagreements can occur and when parties have fallen out, sometimes it becomes almost impossible to agree on the provisions that will apply to their relationship as shareholders of the company. An SHA is a cheap and hassle-free way to minimise potential disputes between the shareholders by clearly stating what the rights and responsibilities of the shareholders are and how important decisions will be taken. This is particularly important in a 50:50 shareholding structure, as a conflict in that scenario may negatively impact the future operation of the company due to a deadlock. By incorporating a dispute resolution mechanism in an SHA, there is a higher chance that disputes between parties will be solved without becoming very expensive and time-consuming.
- Management of the Company
The day-to-day management of the company is mostly determined by the directors while decisions of key importance are required to be taken in general meetings, or by shareholders’ consent. An SHA is a tool for the shareholders to restrict the powers of the directors and limit the matters that are left to the directors’ discretion. In addition, for some reserved decisions, the shareholders may want to have prior, 100% shareholders’ consent before decisions on important matters can be made, rather than relying on a simple majority vote.
- Control the transfer of shares
A Shareholders’ Agreement may set out a mechanism for share transfers if the Articles are silent on this point. A “right of first refusal” may be incorporated in the SHA, providing the existing shareholders an opportunity to purchase the existing shareholder’s shares (pro-rata to their current shareholding), before outsiders may do so. This can be very useful if the remaining shareholders do not want a third party joining the company as they can exercise their right to buy the shares and prevent outsiders from becoming a shareholder. If the existing shareholders decide not to buy, then, if the SHA states, the shares can be sold to a third party.
- Protection for minority shareholders
An SHA can provide protection for minority shareholders by stating that certain decisions can only be taken with either the unanimous consent of all of the shareholders or at least with the consent of such a percentage as to include all or some of the voting rights of the minority. Without an SHA, the majority of shareholders may force issues that are against the minority shareholders’ interest. In addition to that, a “tag-along” provision in the SHA will enable minority shareholders to “tag on” to the majority shareholders in a share sale event if the minority shareholder does not want to stay in the company with an unknown third party.
- Protection for majority shareholders
If an offer is received for the sale of the entire share capital of the company, and the majority shareholders wish to sell, a “drag along” provision in the SHA will assist the majority shareholders to force the minority shareholders to sell their shares on the same terms as the majority.
An SHA works in conjunction with a company’s Articles and provides comfort to the shareholders that they are on the same page, assists to avoid potential disputes, and saves time and money for the shareholders in the long run.
Website content note: This is not legal advice; it is intended to provide information of general interest about current legal issues