Why you should have a Shareholders' Agreement

Why you should have a Shareholders' Agreement

Published: 30 September 2016

Why you should have a Shareholders’ Agreement

When incorporating a new company, or investing in an existing one, it is important to make sure that the relationship amongst all the shareholders is clear and well-regulated.  This helps to avoid any issues arising further down the line, which may lead to internal conflicts, problems running the business and, in the worst case scenario, litigation amongst shareholders and the possible winding-up of the company.

Whilst every company has to have articles of association the Model Articles, often adopted when incorporating a new company, may not be sufficient or adequate for the needs of a business. In fact, while they may work where there is only one shareholder and the scope of the venture is relatively limited, they are likely to become inadequate after a period of investment, development and growth of the company, or when the company’s ownership structure is more complex from the outset.  The expansion of the business or the influx of new capital from external investors will more than likely require the drafting of specific provisions to regulate the new life of the company and the treatment of that investment. It is worth noting that the articles of association are a public document, whereas a shareholders’ agreement is private and can deal with topics such as the treatment of investment and investors say in the running of the company without these falling into the public domain.

Albeit in the UK there is no legal obligation to have one, as companies are regulated by company law a shareholders’ agreement can vary the ordinary legal mechanisms that would ordinarily apply to a company in the absence of one, and can be more adherent to the needs and intentions of the shareholders. A well-structured shareholders’ agreement will cover issues such as share classes and the different rights and obligations associated to them; the issue of new shares; transfers and disposals of existing shares (including mechanisms such as “tag along” and “drag along”); appointment of directors; and other governance mechanisms.  They can also help to ensure that an investor has some say, or is at least privy to, the running of the company and the use of the investment funds. Amongst the key advantages of putting in place a shareholders’ agreement early on in the process, the following should always be taken into consideration:

·     Substantial costs saving by reducing the potential for disputes between shareholders;

·     Easier access to third-party financing, both institutional and from private investors;

·     Giving main shareholders the powers and rights they want in order to control their business;

·     The protection of minority shareholders from unfair manoeuvres by larger shareholders; and

·     The protection of the business from adverse consequences due to changes in one shareholders’ personal circumstances.

If you think your company might need a shareholders’ agreement, please do not hesitate to contact Piers Larbey or Piero Tomassoni in Fletcher Day’s Corporate team who will be able to advise on what is best in your specific circumstances.
 

Piers Larbey
Partner, Head of Corporate