Understanding your shareholder agreement

 

If you own a company and want to open it up to having shareholders, you will need to create a shareholder agreement.

In addition, if you have shares in a company you will usually have to sign this shareholder agreement which sets out the terms and, more importantly, the voting rights that your shares give you.

What is a shareholder agreement?

A shareholder agreement is a contractual document regulating the relationship between company shareholders. The agreement can cover a wide range of things including:

  • Company operations and funding
  • Dividend and remuneration policy
  • Selection and removal of directors
  • Issue and transfer of shares

During its lifespan a company is almost certain to be subject to major events like misconduct by directors, cash flow problems, death or incapacity of a shareholder or new investors wanting to come on board. An agreement provides a strategy for this kind of situation to avoid disagreements between shareholders that could prevent an appropriate or timely response.

How could a shareholder agreement help?

While shareholders normally start out on good terms and with the best intentions, it is not uncommon for relations to sour or for tensions to arise. An agreement can put in place rules to mitigate the fallout from shareholder disputes.

For example, it might be agreed that mediation be used to resolve arguments, or that restrictive covenants will be imposed to stop disgruntled shareholders using company information to set up a competitor.

Where do Articles of Association fit in?

The Articles of Association is a legally required document that, like a shareholder agreement, sets out ground rules for a company. It focuses on the responsibilities of directors, and the powers of the shareholders. However, personal rights of shareholders and restrictive covenants (e.g. non-competition clauses) aren’t necessarily enforced in the Articles of Association.

The Articles of Association lays the rules for how a company will be run. However, it doesn’t necessarily set out how to resolve conflicts. A shareholder agreement is there to provide the contractual remedy. For more information go to our articles of association information page.

Owners of any company with more than one shareholder should give serious consideration to a shareholder agreement. Consult a solicitor for advice on how a shareholder agreement can benefit you, your fellow shareholders and the company, and to help draft a watertight agreement.

If you would like to obtain legal advice about shareholder agreements, we can put you in touch with a local specialist company law solicitor free of charge. So, if you have any questions or would like our help in finding local company law solicitors please call us on 0800 1777 162 or complete the web-form above.

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