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September 5th 2018

Why have a shareholders' agreement?

The constitution of a UK company will include "articles of association" - a document that explains the basic rules about how the organisation is to be run. But sometimes, this doesn't go far enough in setting out how shareholders might work together in a fair and reasonable manner.

A shareholders' agreement is designed to better protect shareholders' investments in the company, establish clear relationships between the shareholders, and explain in more detail how the company is to be run. It will normally include:

  • the rights and obligations of the investors
  • how will the company be run
  • how will important decisions be made
  • rules about the sale of shares
  • protection for minority shareholders

A well-drafted shareholders' agreement should be designed to benefit and protect all parties - the company, majority and minority shareholders.

For example, as a minority shareholder, without the protection of a shareholders' agreement it may be impossible to exercise control or influence over important decisions. A shareholders' agreement on the other hand could be designed so that all shareholders, including minority shareholders, are required to be involved in approving certain decisions - like the appointment or removal of directors, or the issue of new shares, for example.

As a majority shareholder, there may be different concerns. If there is a thought about selling shares in future, there could be a concern that minority shareholders would be reluctant to follow suit. In those circumstances a shareholders' agreement could be established including "drag along" provisions to compel the other shareholders to sell at the same time (for a fair price, that is).

A further big concern may be that shares are sold to a competitor or someone else 'unsuitable'. So shareholders' agreements often contain express provisions about what should happen when a shareholder wants to sell out.

The best time to put a shareholders' agreement in place is usually at the beginning, when the company is first formed and everyone has (hopefully!) a common vision for the business.

For further details, or if you are thinking of forming a new company but aren't quite sure where to start, contact us today. Also, you may find our Guide to Starting a Business helpful.

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