Shareholder Protection – The Shareholder’s Agreement

A Shareholders' Agreement is a helpful document in a business where there are two or more shareholders.

 

It requires the shareholders to consider the principles upon which they intend to operate the company and put in place mechanisms to deal with some of the difficulties commonly faced such as disputes, transfer of shares, death or illness.

 

A Shareholders' Agreement is distinct from the company's constitution, its Memorandum and Articles of Association.

 

Without a Shareholders’ Agreement, a company would be controlled solely by the exercise of shareholding or directorship rights through its constitution.

 

Companies often find out too late that this is insufficient to govern and control the business activities, as opposed to the general administration of the company as a legal entity.

Unlike the constitution, a Shareholder’s Agreement does not have to be filed at Companies House which means sensitive details regarding the role of the shareholders in company management, their rights and obligations or rights attaching to shares can be kept private.

 

Disputes between shareholders and/or directors can be extremely expensive for the company and the individuals to resolve. The potential for disputes can be greatly reduced where clear mechanisms are established to govern the day to day management of the company.

 

A Shareholders' Agreement is particularly useful in situations where a company has two shareholders each holding 50 per cent, or where there is no majority shareholding.

 

A Shareholders’ Agreement commonly includes:

 

The Shareholders’ Agreement is a ‘what if….?’ document which cannot cover all possible eventualities but can narrow the potential for common disputes and reduce delay in resolving them.

 

* David Lucas is a Partner specialising in business and company law with BHP Law. He can be contacted on (01642) 672770.