What is a shareholders’ agreement?

A shareholders’ agreement is a contract between the shareholders of a company (and sometimes also the company itself) that deals with things such as the management of the business and the rights and obligations of the shareholders.

Do I need a shareholders’ agreement?

The short answer is no. There is no legal requirement to have a shareholders’ agreement. However, a shareholders’ agreement can be useful to set up additional framework for the management of your business and set a clear relationship between the shareholders and the company, and the obligations of the shareholders.

As well as helping to govern how your business is managed, a shareholders’ agreement is largely a “what if?” document. It can be used to pre-empt certain situations and set methods of dealing with such situations ahead of time to avoid difficulty later on. For example, whilst all might be running smoothly now, if in the future there is a disagreement or dispute between the shareholders, the shareholders’ agreement can specify how such situations should be resolved instead of having to rely on the expensive and stressful court system.

Additionally, unlike your company’s articles of association, which are available for public inspection at Companies House, a shareholder’s agreement is generally a private document between the shareholders. There may be certain restrictions, obligations or other aspects of the management of your business that you would prefer to regulate privately.

Why should I instruct a solicitor to prepare my shareholders’ agreement?

With the technology available at your fingertips, you might ask why Chat GPT cannot prepare a shareholders’ agreement for you in a few minutes for free, or why you should not just download a template from the internet. You could do this, but such an agreement will lack a personal touch and is unlikely to achieve what you need it to.

A shareholders’ agreement is a complicated document that should be tailored to your business and short and long-term goals. It needs to be dovetailed with your company’s articles of association so the two are consistent, otherwise there is a risk the shareholders’ agreement will become a public document like your articles.

A solicitor will also be able to advise you on the reason for including certain things in your shareholders’ agreement and suggest things that you might not have thought of to help achieve your ultimate goals.

What if I do not have a shareholders’ agreement and there is a dispute between the shareholders?

A shareholder’s agreement can provide a procedure for resolving disputes which is more cost and time effective than having to involve the courts. The potential cost and time savings are best illustrated by a real-life case study:

We acted for a director and majority shareholder in a private limited company.

Our client had been friends with the other director/minority shareholder for a number of years, however that relationship began to deteriorate over time. Our client was accused by the other director/minority shareholder of managing the company in such a way that was unfairly prejudicial to the minority shareholder, and court proceedings were commenced against our client. It was claimed by the minority shareholder that out client’s management of the company had negatively impacted upon the dividends payable to them. Our client had no alternative than to defend that claim and prepare for trial.

The case was settled over a year later before making it to trial. By this time, significant legal costs in excess of £40,000 had already been incurred. If the case had gone all the way to trial, the total costs were
predicted at £100,000 plus VAT per party. During this period our client spent significant time on the trial preparation, which would have been time better spent running the company.

A shareholders’ agreement would have meant that:

  • Court proceedings were not necessary.
  • Legal costs could have been minimised.
  • Wasted management time dealing with the dispute could have been minimised.
  • All parties could have moved forward with their own future business plans at a much earlier stage.