We understand why many start up businesses think they can wait to get a shareholders agreement in place. As against this, there are so many reasons why, when setting up a limited company with several shareholders, that a shareholder agreement is really important.

With many small businesses there are often just 2 or a small number of shareholders and those shareholders are commonly friends, family, colleagues or well known business contracts. The temptation is to believe that going into business won’t impact those strong and established relationships or trust.

No shareholder agreement – big problems later

Unfortunately, as any commercial lawyer or litigation lawyer will tell you, shareholder disputes are common. Without a clear, comprehensive shareholder agreement, real damage can be caused to your business. Some fast growing businesses end up failing not because of a bad idea, product or service but due to a fundamental disagreement or inappropriate action by a director or shareholder.

A shareholder agreement is even more important if you are a passive shareholder who does not have day to day involvement with a company. In that situation, without shareholder agreement your investment is extremely risky.

We commonly draft new shareholders agreements, amend existing shareholder agreements and also advise on and advise individual shareholders who need us to  review shareholder agreements prepared by other solicitors.  Our fees are highly competitive and we have offices in London and also in Birmingham.

If you need cost effective, practical and experienced lawyers for a shareholder agreement please contact us. 

Good reasons you need a shareholders agreement

• Setting out the rights of shareholders
• A shareholder agreement should set out the position on transfer or sale of shares
• Can shareholders block the sale of the business or not? Can shareholders be compelled to sell if a majority agree a sale? This is known as a drag along provision.
• How minority shareholders should be protected, if at all.
• Day to day control and participation – will the shareholders be expected to work in the company?
• Restricting individual shareholders from taking on liabilities and risks – examples can include limiting bank mandates, taking on loans, entering into contracts of certain values or types, starting legal disputes.
• Where directors are separate from shareholders or some shareholders are not directors, limiting the powers or authority of the Board of directors.
• A shareholder agreement will commonly detail what happens if a shareholder dies, becomes seriously ill or gets convicted of a criminal offence or is made bankrupt.
• Pre-emption rights where new shares are issued and a policy on dilution and whether any other classes of shares such as preference shares can be issued in future.
• Veto rights – are there any situations where minority shareholders should have the right to veto certain proposed action.
• Deadlock – if shareholdings are on a 50:50 basis this can create a deadlock. If the deadlock relates to a vital decision on the company’s future, this can hugely impact and damage the business as well as create great friction. A shareholder agreement can provide for what will happen in the event of a deadlock situation.
• Valuing shares in certain scenarios such as on sale or where a shareholder is to leave the company in certain situations which are defined as being a good leaver or bad leaver situation.
• Avoiding shareholder and/or director disputes and where disputes arise, setting out a clear process and potential outcomes to avoid expensive and risky court disputes.

Please do call or email our lawyers for a chat about any issues relating to shareholdings, shareholder agreements generally, a shareholder agreement for a joint venture,  or when investing into a business.