Limited company startups often overlook the importance of having a shareholders agreement. Usually the reason being that it is not a legal requirement and it costs time and money. But if you are just starting your business and there is more than one shareholder having a shareholders agreement in place from the outset will actually save you time and money.
Lots of startups never consider what will happen between the directors and shareholders if a disagreement occurs. This agreement is important to have because it sets out the rights and obligations of each shareholder. It also includes how the business is conducted between shareholders, the directors and the company itself.
Having a tailor-made agreement can ensure the business is protected in the event of the sale of shares, a dispute, incapacity or even the death of a shareholder. There are tons of reasons why you should never overlook this document when setting up a business with other directors who are shareholders, even if they include family or friends.
In this article, we talk about the importance of this legally binding document. What should it include, and how can your business benefit from such an agreement.
What is a Shareholders Agreement?
A shareholders agreement, once signed, is a legally binding document that outlines the rights, obligations and ownership of each shareholder in the company. Having the agreement in place will provide stability should any of the shareholders disagree on business decisions down the road. In other words, it outlines the relationship between the parties/shareholders and the company.
Essentially, the agreement manages certain operations in the company. These include buying and selling the company’s shares and voting rights during shareholders meetings. Also, the decision-making power of both shareholders and directors.
What should a Shareholders Agreement include?
The content of a shareholders agreement depends entirely upon the needs of the shareholders and the company. That is why you should always seek professional advice rather than download a template from the internet. Having a tailored agreement will provide you with maximum protection.
In general, here are some of the key clauses that a shareholder agreement should include:
- The goal of the agreement
- Responsibilities of shareholders
- Voting rights of shareholders
- Legal/financial obligation of each shareholder
- Restriction on sharing and transferring shares
- Transfer of shares if a shareholder dies, becomes bankrupt or retires
- Protection of a minority/majority shareholder
- Tag along provisions
- Dispute resolution procedures
- Confidentiality
- Distribution of dividends
- Exit plan
There are many key provisions concerning a shareholders agreement. But again, the content will depend entirely on the specific needs of the parties.
Why does your business need a Shareholders Agreement?
Your company can benefit from a shareholders agreement in the following way:
- It provides clarity and protection of both minority and majority shareholders’ rights over and above the standard articles of association;
- It also provides an effective strategy for resolving conflicts between shareholders, or shareholders and the company;
- The agreement also provides transparency regarding certain company information, which under the Companies Act 2006 is limited. This way, each shareholder can keep track of their investment and the progress of the company; and
- Confidentiality provisions are also important to ensure sensitive information is not shared with third parties. A non-compete clause for a departing shareholder may also be included in the agreement.
These are only a few of the key benefits of having a shareholders agreement. Ask for legal advice if you have further questions on how your business in particular will benefit from such an agreement.
Final thoughts
Whether your company has a few or a number of shareholders, it is essential to have a shareholders agreement in place. Even if those shareholders are your family and friends. Not only will all parties involved know where they stand from the outset. But they will feel protected should something go wrong in the future.
However, since this kind of agreement is not all-encompassing, we advise you to have it tailored to the specific need of your business. At K&K Legal Consulting, we can draft a Shareholders Agreement tailored to your company setup and which governs the relationship between the shareholders.