What happens if you don’t have a shareholders’ agreement?

Shareholders are people (or companies) that have invested time or money into a company in return for shares (equity) in that company. Shares can have very different rights attaching, for example some shares carry voting rights, some are non-voting but where voting shares are concerned, it is important to ensure the relationship between the shareholders is documented. 

The Companies Act and a Company’s Articles of Association offer strict rules of compliance for shareholders. The shareholders agreement is a private document between the owners of a company which regulates how the shareholders will work together. A shareholders’ agreement should clarify both legal and practical issues such as:

•    Rights and obligations of shareholders
•    Running the company, particularly making important decisions such as appointing any key employees or entering into any key financial agreements
•    Selling existing shares and issuing new shares
•    Dealing with disputes
•    Conflicts of interest
•    Offering clear protection to minority shareholders

man signing a shareholders' agreement

So what happens if you don’t have a shareholders’ agreement? 

Since a shareholders’ agreement establishes the relationship between the shareholders, without one, you are exposing both shareholders and the company to potential future conflict.

This is particularly true in situations where the voting shares in a company are held equally (50% each) by just two people or companies. This is quite often the case with smaller private limited companies. Without the clarity of an agreement, if a dispute occurs and the shareholders can’t reach an agreement, then a deadlock situation may occur since neither shareholder has control of the company. This will obviously prove problematic, particularly if one of the shareholders is acting unreasonably or has caused the conflict due to misconduct.

Share Protection 

Most private limited companies will want to ensure that a shareholder cannot sell their shares to a third party without first offering them to the other shareholders. Likewise, the pricing formula can be predetermined by the shareholders to ensure there is a viable mechanism to complete a share sale.

Preparing a shareholder’s agreement will not only give shareholders more control but will help to avoid the uncertainty and risk of such conflict.

AMD Solicitors’ commercial lawyers in Bristol are very experienced at drafting all types of company documents and would be pleased to talk to you about your shareholder’s agreement. Call AMD Solicitors on 0117 9733989 or email us at info@amdsolicitors.com for more information.

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This article is provided for general information purposes only and represents our understanding of the relevant law and practice as at the date of uploading. This article should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.

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