Reasons to use a Shareholder's Agreement
Q: I am setting up a new company, can you explain to me what is a Shareholders agreement? and give me reasons why I should consider using a Shareholder's Agreement?
A: Put simply, a shareholder's agreement is essentially a contract between some or all of the shareholders in a company and frequently the company itself. The basic purpose of a Shareholder's Agreement is to provide how the company is to be managed and, as far as possible, to prospectively address issues that might otherwise become divisive in the future if not agreed in advance. The agreement can be between some or all of the shareholders in a company and sometimes the company itself, which is intended to govern the rights and obligations of the parties thereto. Frequently, Shareholder's Agreements will also deal with the management of the company. A Shareholder's Agreement can be put in place once the Company has been formed and should be agreed between the shareholders before the business commences.
Here are the main considerations of using a Shareholder's Agreement:
- It ensures secrecy for those provisions which could be publicly sensitive. Often Shareholder's Agreement include the remuneration of the directors of the company and other financially sensitive matters which the parties would not wish to be made known to the public. If such issues were dealt with in the Memorandum and Articles of Association, which are public documents, their contents could be easily discovered by searching the Companies Registration Office.
- They can provide veto rights on certain major business decisions, e.g. borrowing or changing the nature of the business cannot be undertaken without the consent of a specified shareholder or all shareholders.
- Restrictions on the transferability of shares allows shareholders to restrict the free disposal of shares in order to avoid a situation whereby they may find themselves co-shareholders with an incompatible party.
- Through using a shareholders agreement, shareholders may mould their company structure to suit the purposes for which it was incorporated.
- Shareholder's Agreements can be used to give rights and to impose obligations on shareholders that could not be given or imposed otherwise. They are often seen as a way of binding the company and/or its directors to a certain course of action.
- Shareholder's Agreements can be used to bolster the rights and powers of minority shareholders. Specific Shareholder's Agreements, such as pooling agreements, may seek to concentrate voting between groups of members. One definition of a pooling agreement is: 'An agreement among some of the shareholders in a company in which no one shareholder individually has a controlling interest.'
- The shareholder parties to the agreement agree to act as a unit, for example, in managing the company and may agree a right of pre-emption amongst themselves giving each other an option to purchase any shares another party may be selling.
A Shareholder's Agreement is generally considered essential for all companies with more than one shareholder. It is advisable to anticipate and provide guidance on how to deal with any material issues that may arise in the future. A formal written agreement specifically tailored to the company and its shareholders needs can save many businesses future heartache and expense.