A shareholders’ agreement is a contract between a company’s shareholders in which they formalise their relationship and agree how the company will be run. It sets out the rights and duties of shareholders and will often contain important contractual provisions, which might include clauses requiring shareholder consent on specific decisions, regulating the sale of shares and outlining what should happen in the event of a disagreement.

Just as no one wants to think about a pre-nup when they’re newly engaged, it might seem pessimistic or unnecessary to worry about a formal agreement between shareholders when you’re in the first flush of growth. But whilst shareholders’ agreements are not mandatory by law, there’s no doubt they can be vital in helping you navigate long and happy business relationships, for the following reasons:

Protection

An agreement can help protect and balance the interests of all shareholders. It might require a greater majority approval on resolutions than standard company law does. It could include the need for shareholder consent for the sale or purchase of shares or a clause stipulating shareholder pre-emption rights if the company issues new shares. It might contain ‘drag along’ and ‘tag along’ provisions, which allow majority shareholders to drag minority shareholders with them if there is an offer for their shares and to allow minority shareholders to tag along with the majority shareholders if they are selling their shares.

Power

Although the shareholders technically ‘own’ the company, the directors control its day-to-day management. Shareholders may want to set thresholds on the directors’ power and require some of their decisions to need shareholder approval, such as the appointment and removal of directors.

Preparation

Although you are unlikely to be thinking about conflict or the end of your business when it’s booming, it’s important to cover all eventualities in the business lifecycle. The best way to ensure certainty at any stage is to enter into a shareholders’ agreement. A dispute resolution provision can outline exactly what the shareholders should do in the event of a disagreement, for example, it can specify that the shareholders must consider mediation or arbitration before commencing litigation, helping to safeguard the future of the business and the relationships of those who govern it.

These are just a few of the main reasons why a shareholders’ agreement is important to have in place. Any agreement should be reviewed regularly to check that it is up to date and still meets the shareholder and company needs, and should be reviewed if shareholders change.

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