Debitoor's accounting dictionary
Shareholders' agreement

Shareholders’ agreement – What is a shareholders’ agreement?

A shareholders’ agreement is a document created by a company’s shareholders to set out how the company should be run, the shareholders’ rights and duties, the fair price of shares, and the relationship between shareholders and directors.

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Along with articles of association, a shareholders' agreement provides rules by which a company is governed. Whereas all new companies are required to have articles of association according to the Companys Act 2006, shareholders' agreements are not a legal requirement.

A shareholders’ agreement can be between all shareholders, or a specific group. For example, a shareholders’ agreement may only apply to shareholders who own a particular class or percentage of shares.

Why do I need a shareholders’ agreement?

A shareholders’ agreement is designed to protect shareholders’ investment and to ensure that shareholders are treated fairly.

When a company is formed, it must send a memorandum of association and articles of association to Companies House. Articles of association serve a similar purpose to a shareholders’ agreement – they are written rules which outline how a company should be run and governed.

Although a shareholders’ agreement is not a legal requirement, it can add another level of protection for shareholders’ rights.

Furthermore, because a shareholders’ agreement is not a public document, it can expand on the articles of association without disclosing additional information to the public.

When is the best time to create a shareholders’ agreement?

Although it is possible to draft a shareholders' agreement further down the line, it is a good idea to enter into a shareholders' agreement as soon as the company is established. This helps manage expectations and ensures that shareholders understand their duties, obligations and rights from the very start.

You can manage amendments or update the shareholders' agreement when neccessary, but it is good practice to ensure that any changes are in the interest of all shareholders.

Advantages of a shareholders’ agreement

By setting out specific rules about a company and its shareholders, a shareholders’ agreement can be beneficial both to minority and majority shareholders. A minority shareholder owns less than 50% of the shares, a majority shareholder owns 50% or more.

Advantages for minority shareholders

Individually, minority shareholders often has little say in the running of a company. A shareholders’ agreement can give more control to minority shareholders by:

  • Giving minority shareholders the power to veto decisions, or requiring majority approval before important decisions are made. However, provisions which require unanimous decisions may also be problematic, as it can prevent any decisions being made.
  • Creating a ‘tag along’ provision whereby majority shareholders cannot sell their shares unless the same offer is made to all shareholders. A ‘tag along’ provision ensures both majority and minority shareholders get the same return on their investment.

Advantages for majority shareholders

A majority shareholder may want to create provisions within a shareholders’ agreement which:

  • Prevent minority shareholders sharing confidential information within competitors, or setting up a competing company.
  • Create rules about selling and transferring shares. For example, who shares can be sold to, when shares can be transferred, and a minimum price they can be sold for.
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