Why is a shareholders’ agreement necessary?
You can’t underestimate the importance of a shareholders’ agreement. It not only regulates the involvement of the shareholders in the company, but it can help avoid any disputes which may cause financial and reputational harm.
When you undertake a shareholder position at a company, it’s likely that everyone involved is in agreement of the rights, responsibilities, shares and the way the company is managed. However, disputes between shareholders do happen.
If disputes do arise, and there’s no official agreement in place, it can be difficult to negotiate a resolution. A shareholders’ agreement therefore serves as an insurance policy in the event of a future dispute.
- All service agreements longer than 2 years in length require shareholder consent
- The company must keep a copy of the service agreement at its registered office for at least one year following its expiry or termination
- A company must not make termination payments exceeding £200 without the permission from its shareholders
- Any terms which attempt to excuse a director from liability for default, negligence, breach of duty or breach of trust are void in law
What type of disputes may arise between shareholders?
There are a number of disputes which may arise between shareholders if the shareholders’ agreement is not drafted correctly, this includes:
- The imbalance of power between directors and members in relation to salary and bonuses
- The accidental transfer of any shares – for example, as a result of bankruptcy of the death of a shareholder
- A disagreement of the change of business direction
- A disagreement of changes to roles and responsibilities of shareholders
- A shareholder exiting the business and starting up a competitor business
- The entry or exit of existing board members
These are just a few of the potential disputes that can arise in the future if your shareholders’ agreement is not drafted correctly. We therefore highly advise that you speak to a specialist company law expert to ensure you’re covered.
What needs to be considered when preparing a shareholders’ agreement to prevent any future disputes?
There are many things to consider when preparing a shareholders’ agreement to help prevent disputes arising in the future, such as:
- How the business will be run
- What the responsibilities of the shareholders, managers and directors are
- The procedure for the removal of directors by shareholders
- Details of the profit share between shareholders
- Details of remuneration of directors and managers
- The onboarding process of new shareholders
- How disputes will be resolved
- How shareholders will exit the business
- The voting procedure and who has rights
- Clauses to prevent shareholders existing and starting up a competitor business
- The process for any amendments to the shareholders’ agreement
- “Tag and drag rights”
No one can predetermine what potential disputes may arise in the future so it’s impossible to cover everything. However, a lawyer specialising in company law has a vast amount of experience in the various problems that arise, so is best placed to advise on making your shareholders’ agreement as secure as possible.
