A shareholders’ agreement can be one of the most important documents a company’s owners put in place.
When everything is going well, it’s easy to assume that all shareholders are on the same page. But circumstances can change. A shareholder may want to leave, new investors could come on board, disagreements might arise or the business may need to plan for succession.
A well-prepared shareholders’ agreement sets out how the owners will work together, make important decisions and deal with changes in the future. By agreeing these matters in advance, shareholders can reduce uncertainty and potentially avoid expensive disputes.
Here are some of the key areas to consider.
What is a shareholders’ agreement?
A shareholders’ agreement is a contract between the shareholders of a company. It allows the owners to establish clear expectations about how the business will be run and provides agreed procedures for dealing with potential issues.
Discussing these matters while relationships are positive is generally much easier than trying to reach an agreement once a disagreement has already occurred.
Clarifying ownership and shareholder rights
The agreement should clearly record who owns the company and the rights associated with different classes of shares.
Shareholders may contribute different amounts of capital, expertise or time to the business. If this results in different rights, responsibilities or rewards, these should be clearly understood and documented from the outset.
Agreeing how important decisions are made
Some decisions can be handled by the directors as part of the day-to-day running of the company, while others may require shareholder approval.
A shareholders’ agreement can establish which decisions require consent and what level of approval is needed. This can help prevent uncertainty and ensure that significant decisions cannot be made without the appropriate agreement.
Controlling the transfer of shares
Shareholders should consider what happens if one owner wants to sell or transfer their shares.
Without appropriate provisions, there could be a risk of shares being transferred to someone the other shareholders would not have chosen as a business partner.
A suitable agreement can provide shareholders with greater control over who can become an owner of the company.
Planning for succession and exits
Shareholders don’t necessarily remain involved in a business forever.
Retirement, ill health, death or simply a decision to pursue another opportunity could result in a shareholder leaving the company. Planning for these situations in advance can make the transition much smoother.
It can also provide greater certainty for the departing shareholder, their family or estate, as well as the remaining owners.
Preparing for disagreements
Even the strongest business relationships can experience disagreements.
Including a clear dispute-resolution process in the shareholders’ agreement gives everyone an agreed route to follow if a conflict arises. This can help prevent a disagreement from escalating into a prolonged dispute that could affect the wider business.
Protecting the company
A departing shareholder may have access to commercially sensitive information, customer details or other confidential business information.
Appropriate provisions can help protect the company’s interests and give shareholders greater confidence that valuable information and relationships will be safeguarded if an owner leaves.
Planning for future funding
Growing businesses may need additional investment from time to time.
Shareholders should consider whether they are prepared to provide further funding and what happens if some shareholders are willing to contribute while others are not.
Agreeing how additional funding will be handled before the need arises can help prevent difficult conversations later.
Don’t overlook the tax implications
The way shares and ownership are structured can have important tax consequences, particularly when considering succession, bringing new shareholders into the business or planning for a future sale.
Taking professional advice at an early stage can help ensure that the structure supports your commercial objectives and avoids unnecessary tax complications.
Put the right agreement in place
A shareholders’ agreement isn’t simply a legal formality. It gives business owners an opportunity to have important conversations about ownership, decision-making, succession and their long-term plans while everyone is still working towards the same goals.
Putting these arrangements in place early can provide greater clarity and help protect both the shareholders and the business as circumstances change.
Need help with your shareholders’ agreement?
Our London-based accountancy team can assist with share and company valuations and help you understand the financial and tax considerations involved. We can also work alongside a local solicitor to help turn the shareholders’ commercial wishes into a suitable agreement.
Get in touch with us to discuss how we can help.
