Shareholder Agreements: False Economy or Essential Protection?

I am often asked ‘What do I need when I start up a business?’ If the business is to be run through the medium of a limited company with a number of shareholders, I always advise that a Shareholders’ Agreement is appropriate. I am met in reply with ‘We don’t need one of those at the moment’ or words along the lines of ‘I’ve known my fellow shareholders all my life and we’re not going to fall out’. An investment at the outset may however assist later as I explain below.

The reality is that none of us know what is around the corner and action taken at the beginning of a business relationship can save discussion of difficult issues later. For example, what is to happen if a shareholder dies, new shareholders are to be introduced, someone is ill and can’t participate in the way intended or simply wants to effect a change of life direction. Concentration on these issues at the outset allows everyone to know where they stand and what is required of them.

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contract that governs the rights of shareholders between themselves and also with their company. It is additional to matters contained in the company’s constitution (Articles) and is a private agreement which doesn’t have to be filed on the public register at Companies House. Breach of a Shareholder’ Agreement is actionable as a breach of contract claim which is far simpler than bringing a claim based upon the Articles where the company will usually need to be the claimant.

What can a Shareholders’ Agreement contain?

A Shareholders’ Agreement can be used amongst other things to set out the aims and objectives of the company and restrictions upon how shareholders can act without the consent of other shareholders, address issues relating to issue and transfer of shares and set policies such as on dividend distribution.

Careful consideration at the start of any business relationship is therefore encouraged, but this is often overlooked in small companies, which can sometimes function similarly to partnerships, albeit with limited liability.

How Pinney Talfourd can help

At Pinney Talfourd, we can help you determine whether a Shareholders’ Agreement is the right step for your business. Our experienced solicitors will work with you to draft a customised agreement that protects your business and ensures clear guidelines for shareholders. Get in touch with our Commercial team today to find out how we can assist you.