Why should my company have a shareholders agreement?

A shareholders agreement is a funny document. Ideally it is one of those, which once signed, you lock away in the company safe and forget about. However, this belies the importance a properly drafted shareholders agreement can have to a company.

Unlike the articles of association of a company, a shareholders agreement is a private agreement between the shareholders of the company which sets out the rules upon which the directors and shareholders carry on the business of the company. This means a shareholders agreement is not a matter of public record and its contents remain confidential between its parties.

A bespoke shareholders agreement is a versatile form of agreement and can be used in many ways. By way of example it can be used to:

• Try to settle disputes early by codifying procedures to follow when such an event arises;
• Set out the rights attaching to particular classes of shares;
• Control the dividend policy of the Company;
• Set parameters with regard to directors’ decision making powers before they must seek shareholder approval;
• Create protections for minority shareholders, stopping a controlling shareholder from taking advantage of their position;
• Put in place procedures to deal with a shareholder’s shares should he/she die, become bankrupt/insolvent or leaves the company;
• Control how shares are transferred;
• Dictate what happens in the event of a proposed offer to buy the shares or assets of the company; or
• Place restrictions on shareholders, to prevent them competing with the company if ever they leave.

Whether you are a small company with two shareholders, or a larger company with many shareholders, having a shareholders agreement in place could help prevent a costly dispute from arising or provide guidance as to what the directors of a company must do should certain situations arise.

The benefits a well drafted shareholders agreement brings certainly outweighs the initial costs of putting one in place!