7 Reasons Why Your Business Should Have A Shareholders Agreement

by | Apr 14, 2023 | Blog, Legal Updates, YBL Blogs

Summary of Article

A Shareholders Agreement is an important document setting of the contract between individual or corporate shareholders. This article gives 7 reasons why you should put some serious thought into having a shareholders agreement – regardless of the size of your business. 

Shareholder Agreements Solicitor – Why Do You Need A Shareholders Agreement?

What is a Shareholders Agreement?

According to Investopedia,“A shareholders’ agreement can also be called a stockholders’ agreement. It is an arrangement among shareholders that describes how a company should be operated and outlines shareholders’ rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders”.

Whether it’s between yourself and your spouse, your longtime friend, or investors, a Shareholders Agreement is crucial for any limited company, even if it’s just a two-person partnership.

While there are no legal requirements mandating a Shareholders Agreement, I highly recommend it for all limited companies, especially those with multiple shareholders. Such an agreement helps regulate and govern the relationship among shareholders. Even when things are going well, it’s prudent to have an agreement in place in case the relationship sours.

Ideally, a Shareholders Agreement should be established when starting a company, but it’s easy to overlook its importance at the outset. Nevertheless, here are seven reasons why not having a Shareholders Agreement can be detrimental to your business.

1. Shareholders’ disputes

I’ve heard it all before – “We’ve been friends since school,” “She’s not just my wife but also my best friend,” “He’s a good guy, I trust him.” You might believe that you and your co-shareholders will never have a disagreement, that you’ll never fall out, and that a Shareholders Agreement is unnecessary. But my experience tells me otherwise.

As someone who has dealt with numerous shareholder actions in court, I can tell you that most disputes arise after a falling-out between two or more shareholders. These disputes can get ugly, personal, and bitter – much like a bad divorce. And unlike a divorce, there’s usually no “better” relationship waiting in the wings.

That’s why a Shareholders Agreement is so important. It provides a framework for resolving disputes and outlines decision-making processes, including options for mediation or the involvement of a third-party decision-maker, such as an accountant or auditor, if necessary. So don’t wait until it’s too late – take the time to create a Shareholders Agreement now.

2. You want bespoke clauses 

Bespoke clauses are custom provisions that are tailored to the specific needs of a particular Shareholders Agreement. These clauses can be added to the agreement to cover unique situations or to reflect the preferences of the shareholders.

Examples of bespoke clauses might include:

Anti-dilution clause: Protects the value of shares held by existing shareholders by preventing dilution of their ownership percentage in the event of new share issuances or capital raises.

Deadlock resolution clause: Outlines a process for resolving a deadlock situation where shareholders are unable to reach an agreement on a particular issue. The process could involve a third-party mediator or an independent expert.

Non-compete clause: This clause prevents shareholders from competing with the company for a set period of time after they have left the company, ensuring that they do not use the knowledge and expertise gained while working for the company to set up a competing business.

Right of first refusal clause: Gives existing shareholders the first opportunity to purchase any shares that are being sold by a shareholder who wants to leave the company.

Bespoke clauses can be added to a Shareholders Agreement at the outset or as circumstances change over time. They can be a valuable tool for ensuring that the agreement meets the specific needs of the shareholders and that their interests are protected.

3. You want to include minority shareholder rights

Minority protection is a key aspect of a Shareholders Agreement, particularly for minority shareholders who may have less control over the decision-making process of a company. Minority protection clauses are designed to ensure that the rights of minority shareholders are protected. 

For example, you can include a clause stating that minority shareholders have a representative on the board of directors, which grants them a voice in decision-making processes.

By including minority protection clauses in a Shareholders Agreement, minority shareholders can feel more secure in their investments and have greater influence over the decisions that are made by the company. This can help to build trust and cooperation among shareholders and promote the long-term success of the company.

4. You might want to sell the business in the future 

Having an exit plan in place in the event of selling the business is a good strategy.

A Shareholders Agreement can provide guidance and clarity on these issues, ensuring that the sale process is smooth and equitable for all shareholders.

By including provisions related to the sale of the business in a Shareholders Agreement, shareholders can be better prepared for a potential sale. For example, a drag-along clause requires minority shareholders to sell their shares if a majority of shareholders agree to a sale of the company.

This type of clause can help ensure that a sale can proceed smoothly and without delay, and ensure that the process is fair and equitable for all parties involved. 

5. You want to demonstrate business stability

Having a robust Shareholders Agreement in place can demonstrate the stability of the business – which in turn can assist in raising corporate finance from banks or creditors. It also shows that the business is committed to good corporate governance practices and has a long-term vision for success. This can help to build trust and confidence among stakeholders and increase the likelihood of securing financing at favourable terms.

When investors or lenders are considering whether to provide financing to a company, they will often want to see that the business has a strong governance framework in place, including a well-drafted Shareholders Agreement. This document can provide assurances that the rights and obligations of all shareholders are clearly defined, that there is a plan in place for managing disputes, and that the business is well-prepared for various scenarios, including a sale or a transfer of ownership.

7. Someone might leave and set up in competition against you

It’s certainly a risk when you have multiple shareholders in a business and I’ve seen it happen a lot – with some significant damage caused.

If one or more shareholders decide to leave the company, they may decide to start a competing business, which can lead to conflicts of interest and potentially harm the original business.

A well-drafted Shareholders Agreement can help to mitigate this risk by including provisions that address the possibility of a shareholder leaving the company and competing with the business. For example, the agreement might include a non-compete clause that prevents departing shareholders from starting a competing business within a certain geographic area or for a certain period of time.

In addition, the Shareholders Agreement can outline the steps that will be taken if a shareholder decides to leave the company, such as how the departing shareholder’s shares will be valued and how they will be sold to the remaining shareholders or a third party.

You can also dictate convenants surrounding:

  • setting up competing businesses
  • dealing with customers/clients
  • soliciting customers/clients
  • affecting suppliers
  • poaching staff

By addressing these issues proactively in a Shareholders Agreement, you can help to reduce the risk of conflicts of interest and potential harm to the business if a shareholder decides to leave and start a competing venture.

7. You will need to borrow money

If your company needs to borrow money, having a Shareholders Agreement in place can help to provide clarity and structure around how the company will manage its debts and financial obligations.

For example, the Shareholders Agreement might specify the conditions under which the company can borrow money, such as the maximum amount of debt the company can take on, the interest rate that will be charged, and the term of the loan.

It might also outline the roles and responsibilities of each shareholder with respect to managing the company’s debt, such as who will be responsible for negotiating loan terms and who will be responsible for making loan payments.

Do I need a Shareholder Agreement? 

To summarise, if you have a limited company with multiple shareholders, it’s highly recommended to have a Shareholders Agreement in place.

This document can help to define the rights and responsibilities of each shareholder, manage disputes, and provide clarity around decision-making processes.

If you’re in need of a Shareholders Agreement, I provide a fixed-fee service for drafting customised agreements that are tailored to your business needs. We’ll first discuss your specific requirements and then I’ll prepare a bespoke Shareholders Agreement that suits your company’s unique situation.

I’m a commercial solicitor in Leicester and so I help Leicester Businesses (and further afield) in drafting Shareholder Agreements Leicester.

Contact Me Now

Call me on 0116 3667 900 for a no-obligation discussion

Steven Mather

Steven Mather

Solicitor

Hello, I’m Steven Mather, Solicitor – thanks for reading this blog I hope you found it useful.

As you’ll see from my site here, I’m an expert business law solicitor (sometimes called a corporate solicitor, commercial solicitor, company solicitor, but they’re all about advising businesses).

If you’re looking for Remarkablaw advice – fixed fees, great service, and a smile, then get in touch with me today.

Contact Me Today

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