Do I really need a Shareholders' Agreement?

The short answer to the question, “Do I really need a Shareholders’ Agreement?” is ‘Yes.’ Having a Shareholders’ Agreement in place rarely does anything other than aid in cases of dispute. Despite this, it is common for businesses to not consider putting one in place until it is too late.

Why is this?

All businesses are legally required to incorporate Articles of Association - written rules about the running of the business by the agreed shareholders. In most cases, businesses will go with the “standard” outlines of these documents, outlines that usually do not deal with what will happen in the event of deadlocks or disputes between shareholders. Herein lies the issue of not having a Shareholders’ Agreement.

For businesses to avoid or mitigate shareholder disputes, it is advisable to have an agreement specifically catering to the needs of that particular business. However, since there is no statutory requirement for businesses to have a Shareholders’ Agreement (unlike Articles of Association), many businesses do not have them drawn up in time.

What is a Shareholders’ Agreement?

In simple terms, a Shareholders’ Agreement is a confidential contract between a business and its shareholders, enforceable in the same way as any other contract. The agreements are not available to the public via Companies House. The role of these agreements is to safeguard and regulate the relationship between shareholders and the management of the business and will aid in resolving disputes.

How does a Shareholders’ Agreement affect disputes?

Ultimately, a Shareholders’ Agreement will provide the business and its shareholders with the certainty of what will happen should a dispute arise. These disputes can come in the form of (but are not limited to) director breaches, unfair payment policies, conflicts of interest, lack of shareholder communication and derivative actions.?

As previously mentioned, Shareholders’ Agreements do not have to be set up for a business to run. In fact, these agreements can be drawn up at any time during a business’s life cycle and many operate on the belief that it is better late than never. However, since Shareholders’ Agreements seek to better shareholder relationships, it really is better to have one in place.

If a Shareholders’ Agreement is expertly drafted in the first place then they can actually help avoid disputes by regulating the relationships between the business and shareholders. However, in cases of disputes, Shareholders’ Agreements are beneficial documents because they can provide exact evidence of the original agreement between all parties involved, as well as outline what will happen in the occurrence of a dispute.

Who can help in drafting a Shareholder’s Agreement?

Our Commercial Barristers at Mercantile Barristers advise on all forms of Shareholders’ Agreements arising out of all business transactions from investment to Joint Ventures (“JVs”) and from start-ups to mergers. We are also able to draft Shareholder Agreements with a commercial eye and business acumen which are fundamental necessities to protecting clients’ interests.

Matters usually dealt with within Shareholders’ Agreements range from policies on dividends and transfer of shares; disputes between shareholders; protection of minority shareholders; restrictive covenants; rights and liabilities upon a company sale; shareholders’ rights to appoint directors; transfer of shares and share valuation thereafter; and many more.

Since there is no legal requirement to have a Shareholders’ Agreement in place, we understand the temptation to forgo this expense. However, the ultimate cost and repercussions of poorly handled disputes will have a significantly greater cost to your business’s finances and reputation.