Setting up a company allows you to build something of your own, an opportunity to take risks and be in control of the decision making process. Any company that has 2 or more shareholders should consider the benefits of a shareholders’ agreement at the earliest opportunity, on incorporation or as soon as possible thereafter.
What is a shareholders’ agreement?
A shareholders’ agreement is one of the most important legal documents that you will enter into when starting a new company.
It is a private contract that sets out the rights, responsibilities and obligations of each shareholder and how the shareholders’ will act together on certain, prescribed business decisions. It will also cover issues relating to how shares can be transferred during life, on death and if a shareholder has breached certain provisions of the agreement.
If you are starting a company with close friends, you may not see the need for formal arrangements as the business venture is based on trust and friendship. Regardless of the reasons for starting the business, a shareholders’ agreement is an important foundation for any business relationship and it is used to benefit all shareholders whilst everyone is in agreement on how their interest should be protected and how the business should operate. It will allow you to tackle issues early on and may aid in avoiding disruptive and expensive disputes further down the line.
Do I need a shareholders’ agreement?
Companies are not legally required to have a shareholders’ agreement and some opt to include operational details in their articles of association. Unlike the articles of association, which are a public document, the shareholders’ agreement is a private contract between the shareholders which does not need to be filed with companies house.
Avoid conflict between your articles of association and shareholders’ agreement
Both articles of association and a shareholders' agreements outline decisions regarding the management of your company. Avoid conflict by ensuring that these documents are in line with one another.
Cross option agreement
The shareholders’ agreement will normally set out a process for what happens to a deceased’s shareholder’s shares in the event of their death. Normally the ongoing shareholders will not want to end up with a business partner they have not chosen (eg the deceased’s family members who may be beneficiaries under their will) and the deceased shareholder would want their family to receive a value for their shares. In conjunction with the advice of a financial advisor, life assurance policies can be taken out alongside a cross option agreement between all the directors/partners in the business. The terms can be placed within the shareholders’ agreement or in a separate document.
A cross option agreement provides the ongoing shareholders with an option to purchase the deceased’s shares (with the proceeds of their life assurance policy) and the deceased’s estate the option to sell the shares back to the surviving shareholders (for the proceeds of the deceased’s life assurance policy). This allows shareholders to maintain control of the business and buy out the deceased shareholder. It also allows the person who has worked for the share value to realise that value for their family members (or whoever is named as a beneficiary in their will).
A partnership agreement will cover details such as who the partners are, their capital contributions, their rights and responsibilities and what will happen if and when they decide to leave the partnership.
In some respects, shareholder agreements do a similar job for companies as partnership agreements do for partnerships.
Disputes among shareholders or partners can damage or even result in the closure of a business. The benefit of agreeing how the shareholders will deal with a dispute before it arises by clearly defining rights, procedures to follow and options to resolve a deadlock could help to prevent pain and cost in the long run.
If you are setting up a new company and require help or have any questions about the process of entering into a shareholders’ agreement, please do not hesitate to contact our experienced commercial lawyers in Bristol on 0117 962 1205 or fill out a contact form.