A shareholders’ agreement is like a company prenup

What is a shareholders’ agreement?

A shareholders’ agreement (“SHA” for short) is like a prenuptial agreement for your company; a private agreement between shareholders that regulates their relationship after they go into business together and will cover what would happen if, for any reason, the business relationship doesn’t go to plan.

Why is a shareholders’ agreement important?

Having a SHA isn’t a legal requirement and therefore many people choose not to have one.  We entirely understand that putting a SHA in place involves an upfront cost and that many people, when they first go into business together and everything is going swimmingly, might think that this is a waste of money because they get on well together and they believe they have a common understanding of how they want to run their business. We find that family-run businesses are even less likely to have a SHA in place as family members often struggle to see what benefit a shareholders’ agreement might bring them.

We hope you’re right and that, if you do make that upfront investment to put a SHA in place, it ultimately does turn out to be money that you didn’t need to spend.  However, unfortunately in life, stuff happens! Relationships change or can deteriorate, ideas, aspirations or life goals change over time as people reach different stages of their lives, the economic climate changes and sometimes life just throws an unexpected curve ball at you.  At the point that some (or all) of these things have happened and you realise that a SHA would have been a good idea, it might be too late to resolve things amicably or without significant time and expense; rationale discussions might be difficult and emotions may be high.  At times like these, a SHA can provide an important pre-agreed “default” position and will possibly save you a lot of time and expense.

Our advice would be that, whilst relationships are good and business is going well, you consider a SHA.  It is an opportunity to think, whilst everyone is calm, rationale and in a good place, about things that might happen in the future and pre-agree how those situations might be dealt with.

What should be included in a shareholders’ agreement?

We have listed below some examples of what you might want a SHA to cover although this list is not exhaustive.

  • If your business is run by directors who are not also shareholders, how do you expect the day to day running of the business to be carried out and how much say do you expect the shareholders to have?
  • If there is possibility for deadlock between parties with equal shareholdings, how should that be dealt with? Alternatively, if there are shareholder(s) who have a minority shareholding, are there certain key matters that they should be entitled to have a say in relation to?
  • What happens when a shareholder leaves the business and, importantly, what happens to their shares?  This might be for expected reasons (e.g. retirement) or unexpected reasons (e.g. death, bankruptcy, incapacity); it might be an amicable exit or it might not be.  Not everyone wants their fellow shareholders’ shares to be able to pass to unknown parties as, at the end of the day, you chose at the outset who you wanted to go into business.
  • How should the resignation, removal and appointment of directors be dealt with?
  • What happens when an employee / director who holds shares wants to leave the business?  Should they be able to retain their shares or are these “linked to” their employment?
  • What happens if the company needs to raise more money after it is first set up?
  • Do the shareholders want certainty about the company’s dividend policy to know that, for example, a certain percentage of the company’s annual profit will be distributed to them?
  • Should the majority shareholders be able to force a sale of all of the shares in the company (thereby “dragging” the minority)?  Likewise, if the majority shareholders do want to sell but don’t invoke the drag along, should any minority shareholders be able to insist that their shares are sold too so that they are not left behind with an unknown new majority shareholder?
  • Would you want to be confident that your fellow shareholders cannot compete with your business?  Restrictions in a shareholders’ agreement can be more stringent than in an employment contract and remember that shareholders won’t be bound by restrictive covenants in employment contracts if they aren’t employees of the company.

How Moore Barlow can help

We hope that, once a SHA is entered into, it is put in a drawer and doesn’t need to be looked at again but we know, from experience, that isn’t always going to be the case.  If you find yourself in a situation where you do have to get it back out the drawer, we think you’ll be glad you invested some time and money in thinking about the future!

Moore Barlow has one of the largest corporate law departments in Southern England and has experienced corporate lawyers who can provide expert legal advice and guidance to ensure that a SHA is tailored to meet the specific needs and objectives of your business.  At the same time, we work in a way that gives you the time, space and opportunity, as shareholders, to collectively consider how you’d like to approach the key areas to be covered by a SHA before we jump into the legal drafting of the document itself.

If you would like more information on shareholders’ agreements, please contact our Corporate Team.