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Shareholders’ agreements are useful for companies with a relatively small number of shareholders, where the potential for deadlock and disagreement is greater.
A shareholders’ agreement is an optional document that creates a contractual obligation between the shareholders of a company. The benefits of having one include:
Confidentiality
A shareholders’ agreement does not have to be registered on the Companies Register, unlike a company constitution, which is viewable by the public. The shareholders’ agreement is only seen by the shareholders in the company.
Resolution
Provisions can be put in place to resolve any deadlock between shareholders. This will be particularly important where the shareholder arrangement in a company is 50/50 between two shareholders. The shareholders’ agreement can provide options for the shareholders in the event of a deadlock on a major company decision. One example is using put/call options, where one shareholder can purchase the other’s shares if the deadlock cannot be resolved.
Pre-incorporation
The shareholders’ agreement can be entered into before the incorporation of the company, allowing the shareholders to have a clearer idea of what they are entering into and the general direction and purpose of the company. This could also include how the shares will be issued and whether initial funding will come from shareholder loans or third-party loans.
Flexibility
The shareholders’ agreement can be tailored to suit each company’s needs. It may set out how the company is structured, the day-to-day operations of the company, how many directors there will be, and the remuneration for the directors. The agreement can be as simple or as detailed as the shareholders want.
Pre-emptive rights
A significant aspect of a shareholders’ agreement is pre-emptive rights. This is where the shares can be kept with the remaining shareholders when a shareholder decides to sell. With pre-emptive rights, the remaining shareholders are offered the shares to purchase before they are offered to a third party. This may be particularly important in smaller companies where the shareholders only want to deal with other shareholders they know on a personal basis.
Shareholders agreements can be good tool to simply resolve future disputes and clarify your business arrangements. A lawyer specialising in business law can assist if you want to learn more about shareholders’ agreements and whether having one will benefit your company.
