Why are shareholders’ agreements important?

All companies have rules based on company law set out in their articles of association. These are publicly available at Companies House. Alongside the articles, a shareholders’ agreement is a private framework tailored to the needs of the business. 

 

Companies don’t have to have an agreement but it can help to solve problems if they arise. 

 

People who start a business together don’t expect to disagree, but it can happen. A shareholders’ agreement can include a clause about dispute resolution. If there’s a deadlock in decision making or the business relationship breaks down this will provide a structured approach. It can prevent stalemates and protect the company’s assets. 

 

When businesses have majority and minority shareholders the agreement can confirm when everyone must give consent. For example, if an offer is made to buy the whole company, minority shareholders could veto the decision to sell. Alternatively, there could be a clause that allows the majority shareholders to require them to sell their shares. 

 

The shareholders’ agreement covers how to run the company. For example, appointing Directors and agreeing their salary and benefits might be the responsibility of specific shareholders. 

 

The agreement could define Directors’ responsibilities and when consent from shareholders is needed. Depending on the business, protecting intellectual property (IP) might be important, so including a confidentiality clause can protect valuable information. 

 

When shareholders are also employees or Directors the agreement can prevent them from setting up or working in a competing business. This might be more restrictive than their employment contract, so it can help to protect the company’s interests. 

 

The agreement should state clearly what will happen if a shareholder dies or can no longer make decisions due to illness or injury. Surviving shareholders could have the option to buy shares in these circumstances so the company can continue to run smoothly. 

 

The agreement can confirm the distribution of company profits. Shareholders might prioritise repayment of loans they have provided to finance the company, for example. Or the agreement could specify an amount for reinvestment annually. Different classes of shares could pay different dividends. 

 

When a shareholder decides it’s time to move on, the agreement can say how their shares can be sold. It can specify their price and who can buy them. Because a departure might not always be on good terms, the agreement can help to overcome any problems. 

 

A shareholders’ agreement shows you have thought carefully about how your business will operate in the long term. If you want to obtain loans or investment as your business grows this will demonstrate stability and credibility.