What is a Shareholders’ Agreement and Why Do You Need One?

A shareholders’ agreement is vital in order to manage the relationship between shareholders.  When you are working in business with another person then such an agreement can be crucial. Whether the agreement is entered into between all or some of the shareholders, it can give you peace of mind.

Instructing a solicitor to prepare an agreement will focus your minds in terms of how you want to manage the company. It is then clear from the outset as to whether there are any likely areas of dispute, because such discussions will be taking place at an early stage.

What you don’t want is to enter into business only to find that you have different views some way down the line but no agreement to refer to that manages your relationship.

All too often, members of a Company incorrectly believe that the company’s articles of association (the company constitution) will offer the requisite protection. Often they don’t.

At Kitsons, we don’t look at the shareholders’ agreement in isolation, we prepare or review it in conjunction with the company’s articles of association.  It is important that the two dovetail.

What is involved in a shareholders’ agreement?

Minority shareholder protections within an agreement are common. Other important areas to consider are:

  • Managing the sale of shares to a third party
  • Making key decisions relating to capital expenditure, recruitment, key contracts etc
  • How share transfers are dealt with should a shareholder lose capacity, become bankrupt or pass away.
  • Mechanisms to deal with disputes or deadlock
  • Restricting exiting shareholders ability to set up in competition, entice key staff and customers (see below)
  • Dividend policy

Why should you have a shareholders’ agreement?

A shareholders’ agreement is about preparation and protection.  A shareholders’ agreement can also deal with restrictive covenants ie. restricting an exiting shareholder’s ability to set up in competition, or entice staff/customers away from the company.  Without a carefully drafted agreement, you could end up in a situation where no such restrictive trade covenants are in place and a shareholder leaves setting up in competition and taking key employees and your customer or supplier list!

What happens if there is no shareholders’ agreement?

Should you not have a shareholders’ agreement in place then there are remedies under The Companies Act which help to prevent unfair prejudice towards a shareholder.  Pursuing those remedies though an unfair prejudice claim can be extremely costly.  It would be far better to prevent the situation arising through initial careful drafting.

Imagine a situation whereby one of your fellow shareholders is able to sell their shares to a third party.  You could be in business with somebody you don’t know, who you don’t get along with or who lacks experience and is actually detrimental to your company.

The same may be the case in allowing shares to pass in accordance with a shareholder’s Will.  The passing of shares to a family member through a Will may not be an issue in certain circumstances, as beneficiaries may have the requisite experience and be an asset to the company.  What happens, though, if the shares pass to a spouse who has no interest in the business but proves to be difficult and is able to affect how the business is run?  Depending on the percentage of shares that pass in accordance with the Will, a spouse/beneficiary may be able to appoint themselves or anyone else as a director of the company and actually remove other directors.  Again, these unforeseen consequences could have real implications in terms of how the company is then run.

Without an agreement, you could find yourself holding shares in a company that is completely unrecognizable to the business that you first set up.

Wherever you are on your business journey, we are here to help.  We can work closely with your accountants to address issues relating to the buyback of shares from a deceased shareholder, looking at shareholder protection policies to finance the purchase of such shares. This will then give you comfort that, should the worst happen, you will have adequate cash reserves.

If you would like to discuss please contact Corri Pedrick, a partner in our Business Team on 01803 202043 or at corri.pedrick@kitsons-solicitors.co.uk

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    About the author

    Corri PedrickPartner and Head of the Business team

    Corri is a Partner and head of the Business team

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