The importance of a shareholder agreement for your new business

October 3, 2018

When incorporating a new business, it can be easy to focus on immediate concerns of making some money. However, it is also really important to take the opportunity to create a shareholders’ agreement.

A shareholder agreement is a legal document that sets out the rights, responsibilities, liabilities and obligations of the shareholders. Importantly, where the articles of association are filed at Companies House, a shareholders’ agreement is private.

You can use a shareholders’ agreement for a range of purposes such as:

Dispute resolution – Your agreement can set out clear processes for resolving disputes between shareholders. As well as having clear dispute processes, the agreement could even force an obstructive shareholder to sell their shares in certain circumstances.

Share transfers– If a shareholder dies, or simply wants to sell their stake in the business, the agreement can set out what happens. For instance, you could give the business the opportunity to buy the shares back, rather than be forced to sell them to a third party, or provide for free transfer to family members inheriting a share in the business.

Reserved matters– Whilst shareholders may not be involved in the day-to-day running of the business, it might be appropriate for them to be decision-makers on more significant matters. An agreement could require shareholders to approve major changes, such as issuing more shares or amending the articles of association.

Restricting competition– With startups sometimes operating in small pools, you might want to place restrictions on shareholders from starting competing businesses during the sensitive first years.

Protecting minority shareholders – Once in place, a shareholders’ agreement can only be changed if all the shareholders agree. So, setting the right rules early on can help you protect the interests of all investors from the first steps.

Selling a company– On the other side, your agreement could include ‘drag along’ rights, which allow a majority shareholder to force minority shareholders to accept an offer to buy all the shares in a company. Whilst you can’t reduce their share of the proceeds, you could stop a reluctant individual from stopping a sale.

With so much to do at the start of a business’s life, it can be easy to overlook the shareholders’ agreement. But as the above shows, getting it right from the outset can save a great deal of trouble down the line.

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