A shareholders’ agreement is a private contract between shareholders of a company (and sometimes the company is a party to that agreement itself). It is not a compulsory corporate document / agreement, but it is strongly recommended – much like owning a well fitted suit.
This article explores shareholders agreements in detail, including what they are essential for companies and what they contain. We delve into the key provisions often included in shareholders agreements, when is the best time to get one and where you can get one.
Seriously, why do you need a shareholders’ agreement?
To put it simply, the transparent rules (or terms of a shareholders’ agreement) help manage and control shareholder relationships by creating certainty in key situations and offering stronger legal protection against a rogue shareholder. Breaches of contract law are often easier to enforce than breaches of company law, making the agreement an effective deterrent.
What is in a shareholders’ agreement?
These agreements can be tailored to the shareholders’ specific needs. Just as a suit can be double breasted or single-buttoned depending on a person’s preference, a shareholders’ agreement can also be customised through various clauses and approaches. What matters is that the shareholders feel comfortable with its terms, with sensible future‑proofing built in.
Key considerations when drafting a shareholders’ agreement:
Protection of Interests:Â minority shareholders may worry about being outvoted on significant matters such as share issuance or major expenditures. These concerns can be addressed through reserved decisions that require unanimous shareholder approval.
Dispute Resolution & Management: a structured, pre‑agreed process for resolving disputes and addressing deadlock situations helps avoid decision‑making paralysis.
Control over Share Transfers: the agreement can clarify the respective duties of shareholders and directors, support effective management, and define long‑term goals. For example, investor‑shareholders may not require day‑to‑day operational detail, but they should be informed of major decisions such as senior hires.
Operational Stability: this outlines the duties of shareholders and directors, providing clear guidance on management and setting the company’s long-term goals. For example, investor shareholders do not need know the everyday running of the company, but should be informed of important decisions, like hires over a certain salary.
Financial & Succession Planning:Â can establish rules for funding, profit sharing, and what happens if a shareholder dies or becomes incapacitated.
When is the best time to get a shareholders’ agreement?
Usually as soon ass possible, but there is no point in drafting shareholders’ agreement if the company has no value.
That said it’s easiest to establish a shareholders’ agreement before a major investment, expense, or success, as shareholders are more likely to agree – if someone stands to lose more, they’ll focus on negotiating for their own interests rather than the group’s.
It like anything involving a mechanism of control, you need to have buy-in when it is cheap for all parties, therefore timing is important.
Will there be other shareholders’ agreements?
This will not be your first suit…we mean shareholders agreement… or last agreement. As a company grows and becomes bigger with more sophisticated investors and shareholders (e.g. founder and employee shareholders) so must the shareholders’ agreement evolve accordingly.
A start-up does not need a complex or expensive agreement. It needs a basic version emphasising:
- Protection of Interests;
- Dispute Resolution & Management; and
- Control Over Share Transfers.
Why do you need a shareholders’ agreement?
Beyond establishing control and promoting alignment, the agreement signals to investors and lenders (like a good suit) that the company demonstrates:
- An ability to self-organise at shareholder level;
- Legal / administrative sophistication; and
- Familiarity with such agreements, since investors often require their own version to protect their investment.
Where can you get a shareholders’ agreement?
From us, particularly from our Corporate Commercial Team at our Chancery Lane office. You are welcome to visit, even just for a coffee.
To tie in the tailoring analogy: Savile Row is home to some of the finest tailors in the world, and English tailoring is globally renowned – something Alexander McQueen showcased through his dominance of Haute Couture. Similarly, London is home to world class lawyers. Book a call for a fitting…or a coffee.
Get in touch
Get in touchMansour Mansour is a Senior Associate Solicitor who specialises in Commercial, Corporate and Media Law.
Mansour trained in the City, specifically as a Corporate Commercial Solicitor, advising on a number of M&A deals and corporate governance / shareholder strategy matters, and drafting commercial and service contracts.
Mansour has also developed his practice to include advising and negotiating influencer agreements and Brand Partnerships with international brands, such as YouTube, LVMH and Diageo.
He also advises on non-contentious IP and media matters ranging from trademark registration/ownership to content licensing, NFTs, band/group agreements, events/live performance agreements, and talent management agreements.
If you require specialist legal advice or assistance relating to shareholders agreements, get in touch with Mansour today by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
