What Is A Shareholder Agreement? Everything You Need To Know.

When starting a company with multiple shareholders, it’s crucial to have a shareholders agreement in place. Even if you know the other shareholders and trust them, it’s always the best practice to put one in place. Unfortunately, it’s common for parties to fall out or disagree on business decisions. Should that happen, a shareholder agreement will provide stability.

For more information, please visit our independent legal advice page or contact our solicitors directly on 0203 007 5500.

What is a shareholders agreement?

A shareholder agreement is a written agreement entered into by some or all of the company’s shareholders. The agreement sets out the relationship between the shareholders, what happens if a dispute arises, protection for the shareholders, and how the company is run on a daily basis.

In the UK, the primary purpose of a shareholder agreement is to protect and safeguard the shareholders and protect the company against potentially costly consequences if things were to go wrong.

What should a shareholders agreement include?

The content of a shareholders’ agreement depends entirely upon the needs of the parties. However, there are key provisions that all shareholder agreements should look to include, which are:

• Regulating the issuing and transferring of shares. Include provisions to prevent unwanted third parties from acquiring shares and outlining what happens to the shares on a shareholder’s death. Furthermore, the shareholder agreement needs to govern the selling of shares. For example, by including “drag along”, which benefits majority shareholders, as it allows them to sell their shares without difficulty. 
• Protecting minority shareholders. Protection to holders of less than 50% of the shares can include requiring essential decisions to be agreed upon by all shareholders.
• Outlining how the company is run. The agreement can outline how critical decisions in the company are made. For example, appointing, removing and paying directors, frequency of board meetings, banking arrangements and financing the company.
• Dispute resolution procedures. If a dispute arises between shareholders, the shareholder’s agreement will outline how the dispute is resolved. Including the dispute resolution procedure’s in the agreement can save a company a lot of money and time when a dispute arises.
• Paying dividends. This clause ensures the money is paid regularly (usually annually) by a company to its shareholders. 

When should a shareholder agreement be put in place?

Ideally, a shareholder agreement is put in place as soon as shares are distributed or allocated to more than one person within a company. On that basis, each of the shareholders will be confident in their position in the company from the get-go. As a result, they are avoiding any potential future issues.

Suppose no shareholder agreement is in place, and there are differences in shareholders’ opinions. In that case, it will raise alarm bells for companies concerning the future working relationship.

How does a shareholder agreement benefit a minority shareholder?

Regarding the benefits to specific shareholders, the agreements are beneficial to a minority shareholder. A minority shareholder is a shareholder who owns less than 50% of a company’s total shares. When there’s no shareholder agreement, they will often have to ‘team up’ with other minority shareholders to give themselves a voice.

As a result, shareholder agreements will often outline that all shareholders will be required to approve certain decisions made concerning the company, rather than the usual ‘majority rules’ approach.

How does a shareholder agreement help a majority shareholder?

A shareholders’ agreement can also protect majority shareholders. For example, if a majority shareholder wants to sell their shares, and a minority shareholder refuses to agree to a sale. The shareholders’ agreement can contain what is known as “drag-along” provisions so that the majority shareholder can realise their investment in the company at a time and at a price that they deem fair.

Benefits of the agreement?

There are several benefits of having a shareholders’ agreement, some of which are as follows:

• Fast dispute resolution. Without a shareholders’ agreement, disputes between shareholders and directors will have to be settled by the company’s articles of association and the legislation. Settling a dispute in this way will require legal action, which is costly and can increase hostilities between parties. With a shareholders’ agreement, the parties can relax somewhat, knowing there is certainty in resolving disputes. 
• Avoiding deadlocks. Where no shareholder agreement exists, there is a possibility of a deadlock. An example of a deadlock is when shareholders/directors can’t resolve their issue because an equal number of shareholders are on the opposing sides of a decision. Shareholder agreements often include mechanisms by which parties can deal with deadlock situations. 
• Legally binding. The agreement is legally binding, which means civil proceedings can be brought against a party for breaking the agreement’s terms and conditions. Furthermore, a party can use the agreement to defend civil proceedings where appropriate. 
• Protect fellow shareholders. They offer protection to fellow shareholders. If, for example, one shareholder wishes to sell their shares and leave the company, the shareholders’ agreement will set out the procedure for this (e.g. to prevent a sale to an undesirable third party). It might, for example, involve the process of offering the shares to the other shareholders first before placing the shares up for sale. It also may regulate how the shares are valued so that the shareholder does not undervalue them. 
• Demonstrates business stability. The fact that your company has a shareholder agreement in place to help efficiently deal with any potential disputes can make your company seem attractive to any potential investors.

Considerations of the agreement?

Despite shareholders’ agreements carrying with them many advantages, several issues could present themselves. 

• Negotiations. Shareholders’ agreements take time and negotiation to be agreed upon. The parties will need to think about the different scenarios that the agreement should cover. Some may seem this as ‘preparing to fail’. However, even this consideration can be favourable. The time spent agreeing on the terms can avoid costly issues at a later date.
• Inaccurate requirements. Improper or inaccurate delivery of requirements in the drafting of the agreement can cause severe problems. For example, suppose the agreement is necessary to detail with some requirements. In that case, it can result in fierce disputes in the future. For instance, if the agreement states that money is to be paid regularly to shareholders but doesn’t include a time-frame for ‘regularly’, it may cause future disputes.
• Improperly drafted and reviewed. Suppose the shareholder agreement isn’t correctly drafted, reviewed, or undergone extensive amendments. In that case, you may be agreeing to unfair terms and conditions when you sign.