Every business should consider putting a shareholder or partnership agreement in place, depending on your ownership structure.
Even though there is no legal requirement in the UK to have a formal shareholders' agreement, companies with more than one shareholder should consider putting one in place. It is important to have some protection and agreed procedures to resolve a shareholder’s matter or minimise conflict between shareholders in a dispute on an unforeseen situation.
A shareholders' agreement is a simple agreement which can be amended from time to time as a business grows and new shareholders are admitted.
The agreement is confidential and is not filed at Companies House, unlike Articles of Association which are on public record, and so allows shareholders to keep certain matters between themselves.
Properly drafted (together with a set of matched articles of association), a shareholder agreement can document and set out:
Matters which require the consent of all of the shareholders
For example, entry into major contracts, borrowing, allotting further shares, rights to dividends, and exercising voting rights.
A mechanism for dealing with the exit or death of a shareholder
This includes how the value of the shares are calculated and who will be entitled to acquire these shares. It prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the unfortunate event of the death of a shareholder.
It also protects the rights of minority shareholders and the investment value of their shareholding
Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place, it can only be amended with the agreement of all of the shareholders as opposed to just relying on the company’s articles of association, which could be amended by a 75% majority.
All in all, having a shareholders' agreement in place for your business is a cheap and effective way to reduce any potential for business disputes between owners by making it clear how certain decisions are made. It also provides a framework and sets procedures for dispute resolution on the outset.
As the saying goes, an ounce of prevention is better than a pound of cure.
Article provided by Max Tebbitts, Commercial Solicitor at Tebbitts & Co
DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to Tebbitts & Co directly.
Published on 5th January 2018
(Last updated 16th July 2019)