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Shareholders’ Agreements: the one thing shareholders can agree on

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By Jamie Berry

Starting a business or running an existing one can be overwhelming and we understand why you might be reluctant to pile more onto your plate. However, having a Shareholders’ Agreement in place is one addition that is worth it in the long run, both financially and emotionally!

What is it?

A Shareholders’ Agreement sets out the various rights and obligations of the shareholders, explains the correct procedure to follow in specific situations, and governs how major company decisions should be made. This may sound simple enough but a lot of people do not properly consider the implications of certain inevitable events. If a shareholder passes away, where will their shares go? Do you really want to be stuck in business with their spouse or end up with a new, unfamiliar business partner? We suspect not. Having a Shareholders’ Agreement in place will avoid such problems and allow you to control key company matters such as dividend policy, share transfers, and decisions requiring shareholder consent.

Why should I pay for one?

In the event of a dispute, a Shareholders’ Agreement could end up saving you a fortune in legal fees (sometimes in the hundreds of thousands of pounds) and will be priceless in avoiding the stress that accompanies that whole process. Not only is court a stressful and expensive experience, it is likely to result in the irreparable breakdown of shareholder relations and could lead to the company being wound up.

The very process of creating an Agreement will encourage shareholders to engage in important discussions at the outset and ensure that everyone is on the same page.

Shareholders’ Agreements vs. Articles of Association (‘Articles’)

Shareholders’ Agreements should be drafted in conjunction with the Articles. One of the fundamental attractions of Shareholders’ Agreements is that they are private. Unlike the Articles, they do not need to be registered at Companies House, nor are they are accessible by the public for inspection, which is a big advantage for those who wish to keep their company affairs confidential. Some provisions may be included in either document (or both). However, more effective remedies are likely to be available for breach of the Articles. For example, the remedy for breach of pre-emption provisions in a Shareholders’ Agreement (i.e. the right of first refusal for existing shareholders when a shareholder transfers shares) may be limited to damages (which could be difficult to quantify). Yet if the same transfer breaches pre-emption provisions in the Articles, the transfer may be void or the Articles may provide, for example, that all rights attaching to the shares are forfeited.

Whether you document the governance of your company in a Shareholders’ Agreement and/or the Articles is something we can advise upon. The key is ensuring that you actually do document the relationship from the outset to pre-empt any disagreements and provide a clear method for resolving conflicts if a dispute between shareholders arises. Our experienced Business Law team are happy to assist with any queries you may have.

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