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Shareholders’ Agreements

What is a shareholders’ agreement?

A shareholders’ agreement is exactly what it says on the tin – an agreement between the people who own the shares of a company.

Once in place, the agreement governs the relationship between the business owners, including how they manage the business and how shares in the company may be bought or sold.

A shareholders’ agreement is separate from your company’s articles of association and usually does not need to be filed and made public with Companies House.

Why do we need a shareholders’ agreement?

If you’ve gone into business with family members or a close friend, you may not think you’ll need to go to the trouble of signing a formal legal contract.

However, businesses which leave the rules governing their ownership up to a ‘gentleman’s agreement’ between business partners often find themselves in unexpected difficulties later.

For example, if one of the business partners dies, what happens to their shares?

Without a shareholders’ agreement, the remaining shareholders may have to deal with the beneficiaries of that person’s estate if they choose to retain their shares.

The beneficiaries could also sell the deceased’s shares to a third party without giving the other business partners a chance to buy them out.

Often we find that a shareholders’ agreement helps provide a route map to resolving a situation or facilitating an exit, taking heat out of a situation and ensuring issues are resolved quickly and at less cost.

How does an agreement protect shareholders’ rights?

Your shareholders’ agreement can cover everything from the appointment of directors to rights of veto over material decisions taken by the company.

It also governs what happens when a shareholder’s circumstances change, such as if they resign as an employee or director or go bankrupt, and how shareholders can sell their shares (or be stopped from selling by the other shareholders).

Shareholders’ agreements frequently contain ‘tag along’ and ‘drag along’ clauses. These govern the rights of majority and minority shareholders when it comes to transferring shares to external parties.

‘Tag along’ clauses protect the rights of minority shareholders, by ensuring that if the majority (those controlling more than 50% of the company) want to sell their stake, the minority shareholders are entitled to sell their shares to the same buyer at the same price.

‘Drag along’ clauses operate on a similar principle, but to the benefit of a majority shareholder instead. A ‘drag along’ clause allows the majority shareholder to sell their stake and force minority shareholders to do the same.

This is useful, for example, if you own 80% of a business and need access to the cash tied up in your stake, but the buyer you’ve found will only consider buying the whole company.

You can use a ‘drag along’ clause to make the shareholders who own the remaining 20% sell up at the same time as you – but only if you’ve signed a shareholders’ agreement first!

How do I make a shareholders’ agreement?

Every shareholders’ agreement will differ depending on the number of shareholders, the proportions they hold and the dynamics between them.

Drafting a shareholders’ agreement without legal input is therefore risky, as it could mean you are legally bound to something that doesn’t reflect your circumstances or has an impact that you never intended. Our company commercial solicitors can assist with the drafting of shareholders’ agreements.

You may also be presented with a shareholders’ agreement to sign by your business partners (particularly if you are a minority shareholder).

If you’re at all uncertain about the implications of what you’re agreeing to, it’s worth seeking advice from an experienced commercial solicitor who can advise you on any pitfalls.

How much does a shareholders’ agreement cost?

We can propose a fixed fee to prepare or review a draft shareholders’ agreement so you have certainty on costs.

Experience tells us it is well worth investing that money to put in place a good agreement, to avoid much greater costs in sorting out any issues or disputes down the line.

Our expert company commercial solicitors can provide advice on shareholder agreements and related company and commercial legal issues. To speak to a lawyer specialising in business law, call us on 0117 325 2929 or complete our online enquiry form.

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