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The Importance Of A Shareholders Agreement
February 2021

Having a shareholders’ agreement can help ensure your business is well run and maintains clear lines of communication between the shareholders. Crucially, a shareholders’ agreement also includes transparent and agreed solutions in the event there is ever a dispute between shareholders. Consequently, whilst a shareholders’ agreement may not be a document which the shareholders of a company rely on day-to-day, it is a vital document to have in place should certain events or circumstance occur, and can save shareholders from unnecessary uncertainty, cost and strife in the long-term.

When holding shares in a company with two or more shareholders, a shareholders’ agreement is something which should always be considered. Although it is not a legal requirement, its purpose is to further regulate the way business between shareholders are conducted. A shareholders’ agreement is a private agreement and there is no requirement to file it at Companies House or in any other public domain.

Some of the benefits of a Shareholders Agreement are as follows:

Shareholders can retain the right to approve and veto certain decisions

In many cases, not all shareholders of a company will also be directors of that company. As such, those shareholders who are not directors (and not therefore responsible for the day-to-day management of its affairs) may wish to retain the right to veto certain decisions of the directors, or state that the directors cannot do certain things without the consent of a certain number of shareholders, such as incurring debt in excess of a certain level or hiring senior employees.

Sense of direction

A shareholders’ agreement can provide direction and stability. It ensures that the shareholders have agreed mechanisms in place to deal with future events, including disputes or disagreements between the shareholders and the death, insolvency or incapacity of shareholders.

Share issues

A frequent scenario involves the sale of shares or even the creation and allotment of new shares in a company. A well drafted shareholders’ agreement will provide a mechanism to allow (or in some cases, restrict) a shareholder to sell his shares to third parties or to the other shareholders in accordance with a clear procedure which leaves no doubt as to what happens in the event a shareholder does with to exit the company.

Flexible dividend policy

A shareholders’ agreement can provide for a flexible dividend policy allowing for varying dividends to be paid to different shareholders depending upon the classes of shares that they own.

Shareholding employees and directors

Many shareholders, as well as holding shares in a company, will be a director of that company or employed by it in some other role.

If their employment and/or directorship is terminated in certain circumstances a well drafted shareholders’ agreement can ensure that their shares must be transferred to the other shareholders or bought back by the company, to avoid any disharmony between the shareholders or interference in the company after that person has left their employment or directorship. This can be particularly important when disputes arise between shareholding directors and can, to an extent, save companies and their shareholders from extensive legal wrangling and the associated costs when disputes do arise.

The above are just some of the reasons why a shareholders’ agreement is important. The primary purpose of the agreement should be to protect the shareholders and the company.

For further advice please contact us on law@jolliffes.com.

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