A Shareholder Agreement (SHA) is a contract entered into by the shareholders, ideally when the company is formed, that regulates their relationship and governs the management of the company. It outlines shareholders' rights, obligations, positions, responsibilities and protections.
You can create a Shareholder Agreement at any time but it's best to put one in place when you start your business.
1. Ownership, rights, and obligations
A SHA will show the names of all shareholders and details of their shareholdings. It shows what your rights as a shareholder and these include:
- voting rights
- dividend rights
- capital rights
- dividend policy
- limited liability
- and information rights.
2. Decision making
Under the model articles of association directors have the power to make day-to-day business decisions without shareholder approval.
Problems can arise if there is a difference of opinion between the company's members and the board of directors. Including certain conditions within a SHA can limit the decision-making powers of directors and provide greater control to shareholders.
3. Issuing and transferring shares
Rules and restrictions on the allotment and transfer of shares are commonplace in shareholders' agreements. This is crucial for protecting the interests of the company and its members and can be especially useful to protect minority shareholders.
4. Dispute resolution procedures
Disagreements between business partners can happen and it is sensible to plan for this. Providing clear dispute resolution procedures is an inexpensive and effective way to deal with disagreements before they damage the business.
5. Exit clauses
A member's exit from a company can become unnecessarily complex and costly. Exit clauses clearly define the rules on the transfer of shares in such situations and ensure a smooth transition.
6. Restrictive covenants
These prevent shareholders from competing with the company and poaching its employees, clients, and key suppliers whilst they are members.
How do I create a Shareholders' Agreement?
You should use a credible document supplier or library to create your agreement as these are curated by professionals and kept up to date with current legal requirements.
If you are a member of a business group or a Chambers of Commerce, you will probably have access to a document library.
You can also speak to a solicitor, who will be able to prepare something, however, the costs will be higher.
No one starts a business expecting problems, however, they do happen and are a major cause of failure. Getting a shareholder's agreement at the beginning of your business journey means you can focus on building.
Remember, when starting your business: expect the best but plan for the worst.
If you're a business owner and would like to learn more, book a session with Paul through our Business Support free 1-2-1 business advice sessions.
The views expressed in this blog are those of the author and unless specifically stated are not necessarily those of Hammersmith & Fulham Council.
