As the name indicates, a shareholders’ agreement is an agreement between the shareholders of a private company limited by shares. The intention of the shareholders’ agreement is to avoid future disputes or, if they are unavoidable, set out how they may be resolved, hopefully, without having to go to court.
If you are going to operate through a limited company with fellow shareholders, it may well be a sensible a decision to put in place a shareholders’ agreement to clarify what happens in certain situations and to avoid time consuming and costly disputes.
A shareholders’ agreement is used in a number of situations. For example:
- In a “deadlocked company”. This is typically a company with two shareholders who hold equal shares and are also the company’s only directors;
- To protect minority shareholders;
- To set out decision making in a special purpose joint venture company (for example, which has been set up specifically to, say, exploit a patent or to develop land).
In a deadlocked company, the agreement can set out what happens if the 50/50% owners/directors cannot agree. In this case, if the owners cannot agree no decisions can be made. It should set out how to break the deadlock. It can also deal with what happens if one owner has decided to no longer take an active part in the business.
In a company with minority shareholders, multiple shareholders or in a joint venture, there may be decisions which require the consent of all of the shareholders. A shareholders agreement will assist should they want to change the business of the company, make a significant investment, or hire key personnel for example.
Most shareholders agreements will contain restrictions on share transfers. For example, they may provide that shares must not be transferred unless they are offered first to the existing shareholders at a price to be agreed. They may also contain compulsory transfer events which will trigger the offer of shares to the continuing shareholders ie. death, incapacity, insolvency, ceasing to be a director of the company may be compulsory transfer events.
The cost of putting a shareholders agreement in place far outweighs the potential cost and upset of disagreement, fallout and litigation further down the line. Putting such a measure in place also demonstrates a commitment by all parties to drive the business in the same direction and aim for the same goals.