Why you need a shareholders agreement

by Daniel Jones

A shareholders agreement is a document primarily used to protect the rights of minority shareholders in a limited company.

It is designed to ensure that directors do not have the whole say in the future of a company, offering smaller partners a role in how the firm is shaped.

Typically, shares are divided into equal parts whereby each shareholder pays out one fixed sum per share, thus meaning any shareholder to pay out for 51 per cent of the company will have the majority say.

However, the shareholders agreement enables shares to be valued differently so that the division of power is not so clear cut but is fairer for minority shareholders.

One instance where a shareholders agreement is relevant is where a small number of people set out on a venture together with the intention of making most decisions unanimously.

It is also applicable where a shareholder has lent money to the company but does not want to take a personal role in its day-to-day business, such as in a managerial role.

It might be that the firm was originally set up with an end point in mind, thus making it easier for the business to be closed under the terms of the shareholders agreement, where all involved parties have predetermined how business will be wound up.

Although statue will set out the structure and operations of a company in general terms, a shareholders agreement will enable invested parties to tailor these structures to their own tastes, again enabling minority parties to have a say.

You are best advised to draw up a wish list with participating shareholders before you sign an agreement so that all parties can approve the provisions to be included in the document.

It might be that legal advisers are interested in backing the typical shareholder structure, however, it is vital for you to decide how shares should be issued before entering into an agreement where your say may be compromised.

When a company starts up, its funding is likely to come from an authorised share capital of £100, yet the larger this sum is made, the more flexibility you have to divvy out smaller shares of the entire interest.

Additionally, it is best to stick to rounded share prices so that determining voting power remains easy.

When drawing up a shareholders agreement, do not underestimate the significance of a clause relating to intellectual property.

While issues surrounding copyright and names may seem like something easily agreed on in the first instance, the reality remains that disputes can arise and if there is no coverage for intellectual property, it may not be divided how you intended it to be.

At this point it is also worth noting that intellectual property can increase exponentially in size, so again, do not underestimate its value.

Another consideration to be taken into account before drawing up a shareholders agreement is what happens when a party decides to sell their share to somebody new.

The original party may have been very agreeable and easy to work with, however, their replacement may be more vocal and so it is vital invested parties understand how this change would be managed.

The shareholders agreement should cover as many foreseeable possibilities as it can, particularly in respect to directors and the volume of their say compared to minority shareholders.

For a decision to be made, the shareholders agreement needs to set out what the agreement requirements are so that decisions can be effectively made.

Perhaps it might stipulate that the directors must be in full agreement, or that a majority of 75 per cent is enough to pass a motion. Whatever you decide in your wish list should be penned as such to the document.

Download a solicitor-approved shareholders agreement template from Lawpack.

Published on: January 4, 2012

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