A shareholders’ agreements is a private contract between the owners of a company. The need for a shareholders’ agreement may arise on incorporation where there are 2 or more shareholders or at a later date in the life of a business.
The main needs for a shareholders’ agreement may arise in the following situations:
- In a private limited company to set out the main rules and functions of the shareholders
- Where a new shareholder is to be appointed or the percentage holdings of the shareholders are to change
- In a joint venture agreement where the duration and nature of the relationship between the parties as shareholders must be clearly documented
- In management buyouts and mergers where the landscape for the new structure will change from the existing shareholder relationship.
How business owners feel at the start of a business venture may be quite different at a later date. Owners may have differing views on the direction the business should take and there is always the inherent risk that personal circumstances can change for a person holding shares and running a business. For these reasons it is imperative that future planning on how the shareholders will act at a later date is documented whilst shareholders are in agreement. In the absence of a shareholders’ agreement, unless the shareholders can agree on every business decision, it may prove difficult to reach a resolution when the owners are in dispute.
HOW DO SHAREHOLDERS’ AGREEMENTS WORK?
A shareholders’ agreement is usually drawn up by an experienced company solicitor who can provide advice on the main provisions to be included in the agreement and any particular requirements the owners want to include.
The agreement should cover bespoke, practical rules for the running of the company and how the relationship between the shareholders will be managed. The agreement will usually set out:
- The shareholders’ rights and obligations
- How general and specific decisions will be made
- How to resolve a deadlock between the shareholders
- The process for creating new shares in the company
- The process for selling company shares and the valuation process
- Share rights
- The roles of the directors and management of the company
DO YOU NEED A SHAREHOLDERS’ AGREEMENT?
Where 2 or more persons are in business together it is imperative that they document the terms in which they have agreed to work together. The shareholders agreement applies to shareholders in a company and a partnership agreement is required for those who prefer to trade as a partnership or LLP.
A new company with 2 shareholders on a 50:50 split or a small family run businesses will need a shareholders’ agreement in the same way as a larger company with multiple shareholders.
A carefully prepared shareholders agreement will reduce the potential for conflict at a later date by making sure that the owners of a business are clear from the beginning how the business will be run and how the relationship between the shareholders will work.
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To find out more or to book an appointment call AMD Solicitors today on 0117 9733989 and ask to speak to a member of our company and commercial law team. Alternatively, please feel free to email Grant McCall with your enquiry.
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