Having a shareholders agreement in place can help to reduce risk and protect your interests if there is ever a disagreement among the owners of your business.
It is a legal document that can provide clarity on how decisions will be made, how new shareholders can be brought in and what will happen if a shareholder leaves the business, wants to sell, transfer or even dies.
Without a shareholder's agreement, these issues might need to be resolved through negotiation, arbitration or litigation, which can be time-consuming and expensive.
Here are some of the issues your business should consider to help you create your own shareholder's agreement template.
Before you start
Bear in mind that every business is different and all the shareholders of a business are different, and have different motivations.
There is no "one size fits all" shareholders agreement template.
Circumstances change and your legal document will need to be robust enough to protect shareholder's rights in the future.
As a commercial law firm, we recommend you consult with us to ensure that certain clauses are included to suit your needs. Whether you are a new shareholder, selling shareholder or looking to make an investment into a business; we can help you to make important decisions, backed by legal expertise.
Why shareholder's agreements are a vital
This legal document sets out the terms and conditions under which the shareholders will operate and can help to prevent disagreements or misunderstandings further down the line.
There should be a clear statement of the company's purpose and objectives. This will help to ensure that everyone is working towards the same goal, for example, helping the business to grow.
Next, the roles and responsibilities of each shareholder should be outlined. This will help to avoid any confusion about who is responsible for what.
The agreement should set out what will happen if one of the shareholders leaves the company for whatever reason. This will ensure that there is a clear process in place for how their shares will be transferred or sold or how any new shares are distributed.
By including these key elements, you can help to ensure that your shareholders agreement is as watertight as possible.
What to include in your shareholder agreement template
Some key things to include:
- Names and addresses of the corporation and shareholders
- Who owns the shares?: The type and number of shares each shareholder owns, as well as what happens if a shareholder passes away.
- Other share details: For example, how are shares valued in a company where shareholders are forbidden from transferring them?
- Corporate management: What is a shareholders involvement in other areas of the business, including business operations, finances, capital, assets
- Agreement duration: When does the shareholder's agreement begin and end?
- Capital requirements: When you need additional capital, how should you distribute it?
- Shareholder disputes: Disputes may happen for a variety of reasons. Will your shareholder's agreement have clauses for this?
- Dividend policy - how and when are dividends paid?
- Protecting minority shareholders - what clauses will protect minority shareholders or give majority shareholders a greater say in the business?
- Dispute resolution - how can you avoid shareholder disputes over certain issues? Who has the final say and what is the resolution process.
- The process for buying, selling, transferring and issuing shares. Who has refusal or approval?
- Rights and responsibilities of company directors or employees who are also shareholders
- Decision-making processes on the direction of the business
- Privacy and confidentiality
Potential shareholder disputes
Businesses and priorities change over time and that can lead to disputes among shareholders.
For example, if some shareholders are directors and some are not, they will have different roles, responsibilities and expectations.
Conflicts may arise on issues of salaries, bonuses and dividends, where a director / shareholder has more powers than a shareholder who is not a director.
Certain clauses in the shareholder’s agreement can help mitigate this risk.
How shares are transferred
Share transfers can occur unintentionally (for example, on the death or bankruptcy of a shareholder) and intentionally (for example, for personal gain, as a result of argument or to pay off a debt elsewhere).
Other shareholders can restrict who gets the shares and how they are used by setting transfer rights and powers.
What direction should the business go in?
Businesses change frequently over time, either by modifying the goods or services they offer or where or how they operate.
Some adjustments are riskier than others, especially if shareholders take on new roles (for example, trading with a business that is majority owned by one shareholder).
The terms of an agreement should specify when shareholder consent is required for company changes. For example, business-direction may be managed by having investors approve a corporate plan, produced by the board on a regular basis.
Changes to the Shareholder’s role
The board of directors manage the running of a business. The directors report to the shareholders.
As a result, your contract may define the responsibility and limitations of a director's position.
A member can be as active as he or she wants, from being a director to offering advice, to being a "sleeping" lender who gives financing only.
When it comes to day-to-day company management, your agreement should reflect what happens when a member wishes to become more or less involved.
Shareholders and lenders
If a shareholder is also a lender of money and provider of equity to the business, you'll need to consider what happens if their circumstances change.
Time to exit?
Your agreement might make provision for certain future events, such as the sale of the company or some shareholders buying others out.
It's also important to consider what the obligations are of shareholders if the company is wound up.
Former shareholders may attempt to set up, in direct competition with your business. The agreement should detail what happens in this case.
How do I draft a Shareholder Agreement?
If you're not sure where to start, a commercial solicitor can help you create a shareholders agreement template.
This document sets out the key elements that should be included in a shareholders agreement, and can be easily customised to suit your specific needs.
Your lawyer can guide you through a series of questions to make sure that the interests of you and your business are protected.
It's important to ask yourself, who has the power if certain circumstances arise?
What's the difference between a Shareholder Agreement and Articles of Association?
It's important to establish what a shareholders agreement is not.
Articles of association is one of the other documents that are vital according to the companies act.
The most significant distinction between the two is that the articles are a legal duty and published as a public document with Companies House.
A shareholders' agreement is a private contract and details the shareholding relationship. If a person is deemed in breach of the contract by other parties, then legal action may follow.
A shareholders agreement is exclusively between company shareholders and is designed to improve the relationship between them.
A company's articles of association are written rules about the running of the company and agreed by shareholders, as well as guarantors, directors and the company secretary.
Your shareholder agreement is also different to your business plan. The business plan details the strategy and objectives for the business, whereas the shareholders agreement focuses on shareholders rights.
Can you write your own shareholder agreement?
You can write your own shareholder agreement and it's easy to find a shareholder agreement template online.
But why take risks without an in-depth knowledge of UK company law?
Is a shareholders agreement legally binding?
Yes, a shareholders agreement is a legally binding contract between the shareholders of a company. It sets out the rights, duties, and obligations of each shareholder, as well as the rules for making decisions and distributing profits.
By having a shareholders agreement in place, you can avoid misunderstandings and conflict down the road.
You should see legal advice from a specialist commercial solicitor to ensure that your rights are protected when creating the shareholders agreement.
What happens if you breach a shareholders Agreement?
If you breach a shareholders agreement, you may be liable for damages. Additionally, the court may order specific performance of the contract, meaning that you would be forced to comply with the terms of the agreement.
The court may issue an injunction, which would prevent you from taking certain actions that are in breach of the agreement. If you are found to be in breach of a shareholders agreement, it is important to seek legal advice as soon as possible to avoid further legal action and potential costs.
Arguing that an action has harmed a shareholder's share value is one of the most common reasons to take action.
Can a shareholder be forced to sell shares?
Yes, a shareholder can be forced to sell their shares under certain circumstances. For example, if a shareholder breaches the terms of the shareholders agreement, they may be required to sell their shares. Additionally, if the company is sold, shareholders may be required to sell their shares as part of the sale.
If a shareholder dies, their shares may be required to be sold by their heirs.
Drag along rights enable a majority shareholder to force a minority shareholder to join in a sale of the company.
Find out more about drag along rights.
If you need expert legal advice to help create or review a shareholders agreement, get in touch now.