Why is a shareholders’ agreement important?

The primary purpose of a shareholders’ agreement is to control the way business between shareholders is conducted. It is an agreement that governs the shareholder to shareholder relationship and the shareholder to company relationship. Although a shareholders’ agreement is not a legal requirement, they are recommended as good practice to avoid disputes in the future.

A well drafted shareholders’ agreement should provide clarity on certain key matters that affect shareholders such as;

  • what rights they have as a shareholder
  • when they need to be consulted by the directors on decisions affecting the company
  • under what circumstances they can transfer their shares to a different person

Shareholder agreements can be designed to cater for start-up companies, joint ventures and private equity investments. There is a common misconception that shareholder agreements are only required for large companies. Those involved in the running of small, private or family-owned companies may feel that such formal arrangements are unnecessary and that informal decision-making arrangements are suitable. However, shareholder disputes can, and do, occur in companies of all sizes. The absence of a shareholders’ agreement opens up the potential for disputes and disagreements between the shareholders.

Shareholders agreements contain provisions that pre-empt disagreements and set out appropriate ways for disputes to be addressed. Often business owners set up companies with friends and relatives and do not consider protecting their interests in the company until it is too late. The articles of association of the company may not offer a shareholder full protection.

Operating without a shareholders’ agreement risks disputes that could give rise to lengthy and costly legal proceedings. For this reason, it is recommended that a shareholders’ agreement is put in place as early as possible after the company’s incorporation and allocation of shares. This can provide an effective mechanism for resolving a dispute, should one arise, and it will potentially reduce the risk of time-consuming and costly mediation or litigation later on.

If you would like more information or advice on shareholders’ agreements for your business please contact Steve Hanbury or call us on 01803 403403.

The content of this article is correct as at the date of posting and is for information purposes only. Whilst we try and ensure it is accurate we do not warrant or guarantee that this is the case, nor do we accept any responsibility in the event that it is relied on. The information is not intended to be a substitute for legal advice which you are recommended to obtain.

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