Getting a shareholders’ agreement right

A shareholder’s agreement can be one of the most valuable documents a business ever puts in place. It allows a company’s owners to set out, in detail, how they will work together, make decisions, deal with disputes and manage future changes in ownership.

When a business starts, everyone is positive and shares the same objectives. However, circumstances can change. Shareholders may wish to leave, new investors may join, disagreements could arise, or succession plans may need to be implemented. A well-drafted shareholders’ agreement helps provide certainty and can significantly reduce the risk of costly disputes.

In this article we set out some of the key areas to consider when putting together a shareholders’ agreement.

What exactly is a shareholders’ agreement?

A shareholders’ agreement is essentially a contract between the shareholders of a company. It provides shareholders with an opportunity to establish clear expectations from the outset and create mechanisms that help to deal with future problems.

By preparing an agreement before problems arise, it is easier to discuss matters objectively.

Ownership and shareholdings

The agreement should clearly set out who owns the company and the rights attached to different shares. Where shareholders contribute different levels of capital, expertise or time, they may expect different rights and rewards. This needs to be clearly recorded up front.

Decision-making

Not all business decisions have the same level of importance. Shareholders should consider which decisions can be made by directors and which should require shareholder approval.

Clear decision-making procedures help avoid uncertainty and ensure that certain actions cannot be taken without appropriate consent.

Share transfers

It is often a good idea to control who can acquire an interest in the business. Without suitable provisions, shares could potentially be transferred to individuals whom the remaining shareholders would not choose as business partners.

Succession and exit planning

Few shareholders expect ownership to remain unchanged indefinitely. Retirement, ill health, death or a desire to pursue other opportunities can all lead to someone exiting a business.

Planning for these events in advance can make ownership transitions smoother and reduce uncertainty for both the business and the departing shareholder’s family or estate.

Resolving disputes

Even where shareholders have a strong relationship, disagreements can sometimes arise. Including mechanisms for resolving disputes helps to provide a structured way forward and reduce the risk of a lengthy conflict that could derail the business.

Protecting the business

If a shareholder leaves the business, there may be concerns about how they might use confidential information. Appropriate protections can allow everyone to feel comfortable and safeguard the value of the company.

Funding the business

As businesses grow, they may require additional investment. Shareholders should consider whether they are willing or able to provide further funding and what happens if some shareholders contribute while others do not.

Tax considerations

The way ownership is structured can have significant tax consequences, particularly where succession planning or a future sale of the business is anticipated.

Considering tax implications at an early stage may help shareholders achieve their commercial objectives in a more tax-efficient manner.

Conclusion

A shareholder’s agreement is more than a legal document. It is an opportunity for shareholders to discuss ownership, decision-making, succession and future ambitions before any of these become an issue. Taking time to address these matters at an early stage can help protect both the business and the owners for years to come.

Please talk to us if you need help in planning for an agreement. We can help with share and company valuations and in putting the shareholders wishes into an agreement with a local solicitor.