Starting or growing a business with other shareholders is an exciting step, but it is important to think about what could happen if circumstances change in the future.
While many business owners focus on setting up the company and planning for growth, far fewer consider what would happen if a shareholder wanted to leave, disagreements arose or ownership changed unexpectedly.
A shareholder agreement can help protect both the business and its owners by setting out clear rules from the outset. Although it is not a legal requirement, it can prove invaluable if issues arise later on.
What is a shareholder agreement?
A shareholder agreement is a legally binding contract between some or all of a company’s shareholders. It sets out how the company will be managed, the rights and responsibilities of shareholders, and what should happen if certain situations arise.
Unlike a company’s Articles of Association, which are publicly available at Companies House, a shareholder agreement is a private document that can be tailored to the specific needs of the business.
Why is a shareholder agreement important?
Many business owners begin their journey with friends, family members or trusted colleagues. While everyone may be working towards the same goal, circumstances can change over time.
A shareholder agreement helps provide certainty by setting out agreed procedures before problems occur. It can reduce the likelihood of disputes and make it easier to resolve issues if they do arise.
Having clear expectations from the beginning can help preserve business relationships and minimise disruption to the company.
What should a shareholder agreement include?
Every business is different, but a shareholder agreement commonly covers matters such as:
- how important decisions will be made;
- the rights and responsibilities of shareholders;
- what happens if a shareholder wishes to sell their shares;
- how shares should be valued;
- what happens if a shareholder dies or becomes seriously ill;
- restrictions on transferring shares to third parties;
- dividend policies;
- dispute resolution procedures; and
- how confidential business information should be protected.
The agreement can be tailored to reflect the size, structure and objectives of the business.
What happens if there isn’t a shareholder agreement?
Without a shareholder agreement, disputes are often more difficult to resolve.
If a shareholder wants to leave the business, sell their shares or disagreements arise over how the company should be run, there may be no agreed process to follow.
This can lead to uncertainty, strained relationships and, in some cases, expensive legal proceedings.
Having a well-drafted agreement in place can help avoid many of these issues before they develop.
When should a shareholder agreement be put in place?
Ideally, a shareholder agreement should be prepared when the company is formed or when new shareholders join the business.
However, it is never too late to put one in place. Existing businesses can still benefit from reviewing their arrangements and agreeing clear rules for the future.
The earlier potential issues are discussed, the easier they are often to resolve.
Why legal advice matters
A shareholder agreement should reflect the unique circumstances of your business and complement your company’s Articles of Association.
Taking legal advice ensures that the agreement is drafted correctly, covers the issues most relevant to your business and provides the protection shareholders expect.
An experienced commercial solicitor can also identify potential risks that may not have been considered and help future-proof the business as it grows.
How Oliver & Co Solicitors can help
If you’re setting up a new business, bringing in new shareholders or want to better protect an existing company, putting a shareholder agreement in place is a sensible step. Our experienced Commercial team can provide clear, practical advice and draft an agreement tailored to your business, helping to safeguard your company and reduce the risk of future disputes. Contact us today to find out how we can help – call 01244 312306 or email us at law@oliverandco.co.uk.
