What is… a shareholders’ agreement?

If you set up a limited company and decide to sell or give shares to others, it’s a good idea to draft a shareholders’ agreement.

This, as its name suggests, is a legal document that defines the relationship between a limited company and the people (or organisations) who hold shares in it. It may also set out the relationship between different types of shareholder where there’s more than one type and how dividends will be paid.

Why have a shareholders’ agreement

As part of the incorporation process, you’ll need to submit a Memorandum and articles of association for your company to Companies House. These concern shareholders to the extent that they sign to agree to form the company and agree on the general principles about how it’ll be run.

However, a shareholders’ agreement takes things further. It allows you to set out, in detail:

  • how you’ll manage the company and how the big decisions will be made
  • how you’ll manage the sale and purchase of shares in your company
  • exactly what you expect of your shareholders – what they can expect from you

For the purposes of this article, we’ll assume that you, as the owner and founder of the company are, to start with at least, the majority shareholder.

Imagine this scenario. Another company or individual wants to buy your company and take ownership of all its shares. You’re keen to sell, but there’s a minority shareholder who refuses to play ball. Without a shareholders’ agreement in place, there’s very little, beyond persuasion and financial incentive, you can do to make the deal happen and sell your business.

However, a shareholders’ agreement with a provision that forces a minority shareholder to sell their shares if the majority shareholder(s) accepts an offer for the business, averts the issue.

Another good reason to have a shareholders’ agreement is to protect confidential information about your company from getting into the wrong hands. For obvious reasons, shareholders are party to information about how the company performs financially. Depending on how involved they are in the business (they may also be employees and/or non-executive directors) they may also know quite a bit about your trade secrets, patents, copyrights and relationships with other organisations. All this information could be gold dust to a rival – or the shareholder themselves if they contemplate setting up in competition with you.

Finally, think about what may happen if a shareholder decides to sell their shares. You’ll probably want some control over who can buy them. You won’t, for example, want them being sold on to a competitor or someone whose influence in your business could be undesirable. Again, a well-drafted clause in a legally binding shareholders’ agreement will cover you for this predicament.

Do it now

It’s never too late (or early) to prepare a shareholders’ agreement. It is, however, vital that, whenever you create one, it’s legally binding. So, to ensure your shareholders’ agreement meets all your needs and covers you for all eventualities, get started with the Smarta Law Assure legal document tool now.

Law Assure allows you to create nearly 130 legal documents online. Try it free now.

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