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Do I need a shareholders' agreement?
Hello, everyone. Today, I'd like to briefly talk about an underappreciated aspect of running a business in the UK – the shareholders' agreement. This legal document often goes under the radar, but can be very important in protecting your interests as a shareholder, and the stability of your company.
What exactly is a shareholders' agreement?
A shareholders' agreement is a legally binding contract between each of the shareholders of a company and the company itself. It details the rights, responsibilities, and obligations of each shareholder, and it's entirely customizable to address the specific requirements of your company. It’s enforceable by law in the UK provided it does not conflict with case law or legislation, in particular the Companies Act 2006.
So, why is a shareholders' agreement important for businesses operating in the UK?
The short answer is that unless a shareholders’ agreement is properly drafted, the company is unlikely to receive serious investments because investors will usually know that their interests will be properly protected. Thus, there may be tension between Founders and Investors in the drafting of an SA if a good agreement has not been drafted before the arrival of serious investors.
A good shareholders' agreement clearly defines the roles and responsibilities of each shareholder, as well as those of the company’s directors. This helps prevent conflicts within the company and between shareholders. One way it does this is by defining how board members are appointed, and how they are terminated, as well as the division of powers between directors and shareholders in relation to significant actions of the company, such as selling all or part of the business, issuing new shares, or declaring dividends.
Further, it provides for the (limited) protection of minority shareholders; the interests of minority shareholders are protected (to some extent) by ensuring their voices are heard and their rights are protected. For example, the percentage of shareholders required to agree to the issue of new shares can assist or prevent a majority of shareholders from further diluting minority shareholders.
Finally, and often these are the most important provisions, the agreement addresses how shares can be sold or transferred, promoting a smoother and fairer (to all parties) transition if a shareholder decides to leave the company.
Related benefits include a structured way to resolve disputes, potentially saving your company from costly legal battles, and restrictions on the sale or transfer of shares to outsiders, giving existing shareholders a say in who enters the company.
For start-ups generally, and technology companies in particular, confidentiality and non-compete clauses are essential for protecting the company from its founders and investors in circumstances where they have not signed employment or director’s service agreements - the shareholders’ agreement may be the only document containing clauses to protect sensitive information and prevent shareholders from competing with the company before and even after leaving.
A shareholders’ agreement can be tailored to the specific needs of your company and can be updated as circumstances change. Courts in the UK recognize shareholders' agreements as binding contracts, and breaches can lead to legal actions, including injunctions and damages.
In summary, a shareholders' agreement is a document that businesspeople in the UK ought to be aware of and to understand, at least in principles. A good one safeguards your rights, promotes harmony among shareholders, and provides a guardrail for your company's future. I strongly recommend considering a shareholders' agreement that suits your specific needs and helps protect your business. Thank you for your attention, and if you have any questions, please feel free to make contact.