Getting a shareholders’ agreement right

A shareholders’ agreement can be one of the most valuable documents a business puts in place. It establishes how owners will work together, make important decisions, resolve disputes and manage future changes in ownership.

When a business starts, shareholders often have shared objectives. Over time, however, circumstances can change. Someone may want to leave, new investors could join, disagreements may arise or succession plans may need to be considered.

Having a well-drafted agreement in place can provide certainty and significantly reduce the risk of costly disputes.

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between a company's shareholders that establishes their respective rights and responsibilities.

Putting an agreement in place while relationships are positive makes it easier to discuss potentially difficult issues objectively and agree how they should be handled in the future.

Ownership and shareholdings

The agreement should clearly establish who owns the company and the rights attached to different classes of shares.

Where shareholders contribute different amounts of capital, expertise or time, they may expect different rights and rewards. Recording these arrangements clearly can help prevent disagreements later.

Decision-making

Shareholders should agree which decisions can be made by directors and which require shareholder approval.

Clear procedures can prevent uncertainty and ensure major decisions cannot be made without the appropriate level of consent.

Share transfers and exits

It is important to consider who should be allowed to acquire shares in the business. Without appropriate provisions, shares could potentially be transferred to someone the remaining shareholders would not choose as a business partner.

The agreement can also establish what happens when someone wants or needs to leave because of retirement, ill health, death or other circumstances.

Planning ahead can make these transitions considerably easier for the business, departing shareholders and their families.

Resolving disputes and protecting the business

Even shareholders with strong working relationships can disagree. Establishing a process for resolving disputes provides a structured route forward and can reduce the risk of disagreements disrupting the business.

The agreement can also include appropriate protections around confidential information and other commercially sensitive matters if a shareholder leaves.

Funding the business

Growing businesses often require additional investment. An agreement can establish whether shareholders are expected to provide further funding and what happens if some shareholders invest additional capital while others do not.

Don't overlook the tax implications

Changes to shareholdings and company ownership can have significant tax consequences, particularly when planning for succession or a future sale.

Considering the tax implications early can help shareholders structure their arrangements in a way that supports both their commercial and financial objectives.

Planning ahead

A shareholders’ agreement is more than a legal document. It provides an opportunity for business owners to discuss ownership, decision-making, succession and their future ambitions before problems arise.

Taking the time to establish these arrangements early can help protect both the company and its shareholders for years to come.

If you're considering putting a shareholders’ agreement in place, speak to SJC, Chartered Accountants. We can assist with share and company valuations, tax considerations and work alongside your solicitor to help ensure the agreement reflects the shareholders' objectives.