The General Principles of a Shareholders’ Agreement

Friday, January 31, 2020, 6:00 AM | Leave Comment

Shareholders are members who own shares in a company, usually on the back of a financial investment which gives them certain rights.

One of those rights is the right to vote on company policies and decisions that affect the daily running of the company which is normally based on the percentage of shares they hold.

Shareholders can be directors, family members, employees, friends or even members of the public in larger corporations.

When setting up a company with shareholders, even if they are family members, it is a good idea to draw up a shareholders’ agreement to ensure there are no major issue further down the line.

  • What is a shareholders’ agreement?

    A shareholders’ agreement is a contract between the shareholders of a company in which they agree on how the company is to be run and what their rights and obligations are in respect of each other.

    According to Moyen Ahmed from Stockport based Integra Solicitors “A shareholders’ agreement is designed to protect all the shareholders’ investments and ensure that a fair relationship is established in relation to the running of the company.”

    A shareholders’ agreement will define the rights and obligations of the shareholders. Amongst other things it will regulate conditions for sale of shares in the company, give a detailed account with regard to the running of the company and define how important decisions will be made, this is usually through voting rights of the majority shareholders. There will be an element of protection provided within the agreement for minority shareholders within the company too.

  • Do I need one?

    The short answer to this is that if you have shareholders in your company, you should have a shareholders’ agreement. It is the only way to truly protect you, your company and the shareholders and avoid significant problems later on.

    For example a shareholders’ agreement is designed to protect major shareholders from things such as minority shareholders transferring their shares to whomever they choose. The agreement will outline who all shareholders are allowed to sell or transfer shares to, under what circumstance and when.

    There will be provisions in place should a major shareholder wish to leave the company, maybe to set up their own one, to protect the company. There will usually also be a death clause to determine what happens with inheritance shares.

    Minority shareholders will also need protection within the agreement from the power of the majority shareholders to ensure a fair working practice. For example they should be granted a ‘tag along’ provision which means that whatever offers are made to the majority shareholders to buy them out, should also equally be offered to the minority shareholders.

    All this means that there is no risk to the company should people wish to move on for what ever reason and that everyone is protected financially against their investment. It ensures a smoother day to day running of the business when the rules are laid out beforehand.

  • Is a shareholders’ agreement legally binding?

    A shareholders’ agreement is a legally binding contract between the company shareholders. Although it is not a legal requirement to have a shareholders’ agreement, it is highly recommended and once signed, it is legally binding.

    The shareholders’ agreement is a private agreement with no requirement to file it at Companies House. This means that the confidentiality of the agreement is protected and only the shareholders are privy to what is contained within it.

    All shareholders, whether majority or minority shareholders, will be covered by the agreement and each one is tailored to suit the needs of the individual company. The purpose of the agreement is to protect all members and ensure fair conditions for all while also protecting the company.

Author Bio

Moyen Ahmed is a Head of SEO at Backlinksmedia. He is expert on link building.

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