Shareholders Agreements – why do we need one?

Shareholders Agreements are a bit like prenuptial agreements for business owners. They tend to deal with three main areas – money, decision making, and very often most importantly, exit.  

Shareholders Agreements are essential where there is an inequality in shareholder’s ownership or where there is more than two shareholders. Even 50/50 shareholders can benefit from a Shareholder’s Agreement. Shareholder’s rights come from either the Companies Act or the company’s Articles of Association. However, the Companies Act does not cover every situation and the Articles of Association is a public document that anyone can look at. A Shareholders Agreement allows the parties to privately agree how they want the company to be run at board level (something Shareholders only have very limited rights to do otherwise), what shareholders decisions should be unanimous (many by default are otherwise by majority) and what happens when a shareholder is to no longer be a shareholder.  

Shareholder exits can fall into one of three categories – the good, the bad and the ugly. As you would image the good exits tend to be normal retirement to either enjoy the garden, grandkids, travelling etc. or just to do something else. No one has fallen out its just time to move on. A Shareholders Agreement can help practically and financially manage this situation.  

The bad exits are when a shareholder dies, is made bankrupt or no longer has mental capacity. In those situations, without a Shareholders Agreement you might find yourself with new shareholders (family members, the trustee in bankruptcy, an attorney) involved in the company.  

The ugly exits are where the parties fall out. Without exit provisions and where parties cannot agree sometimes their only recourse can be expensive litigation.

A Shareholders Agreement should be the default position for most situations. You can always vary it by unanimous agreement if things change in the future but its always better to plan now. If you have not got a Shareholders Agreement and want one our Commercial Team can assist with practical and clear advice giving you an agreement that suits your situation and needs.  

For guidance and advice contact Hannah Clark.
Learn more about our Commercial Services here – Commercial | Thursfields Solicitors.

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