{"id":6659,"date":"2019-08-30T09:27:22","date_gmt":"2019-08-30T08:27:22","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=6659"},"modified":"2022-03-07T11:36:38","modified_gmt":"2022-03-07T11:36:38","slug":"what-is-a-shareholders-agreement-and-why-do-i-need-one","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/what-is-a-shareholders-agreement-and-why-do-i-need-one\/","title":{"rendered":"What is a shareholders\u2019 agreement and why do I need one?"},"content":{"rendered":"

This guide will inform you of the key benefits of a shareholders’ agreement and reasons for choosing to implement one within your organisation. Even if you have a new company with very few staff, or you’re running the business with just one other person, having a formal agreement in place can prevent potential complications further down the line.<\/p>\n

What is a shareholders’ agreement?<\/h3>\n

A shareholders’ agreement is a legally binding arrangement established between a company\u2019s shareholders (members). It governs the relationship between members, protects their individual and collective rights, and regulates the management of the organisation itself. Without such an agreement, disputes between shareholders have the potential to grind a company to a halt.<\/p>\n

Providing for many eventualities, a shareholders’ agreement works alongside the articles of association to clarify the rights of members, stipulate the rules that must be followed when running the company, and provide clear policies and procedures for share ownership and dispute resolution. Such explicit provisions are valuable to all members, whether minority or majority shareholders.<\/p>\n

Whether you’re setting up a business with family or close friends, or becoming a shareholder in a larger organisation, a shareholders’ agreement will help to protect everyone’s interests and avoid disputes and disagreements between members.<\/p>\n Company shares \u2013 paid, unpaid and partly paid<\/span><\/a>\n \n

How does this differ from the articles of association?<\/h3>\n

There are notable differences between a shareholders’ agreement and articles of association (which form part of the company\u2019s constitution, along with the memorandum of association).<\/p>\n

The articles of association form a contract between the company and shareholders, whereas a shareholders’ agreement forms a contract between the shareholders themselves. Although they both contain rules on how a company operates, there are certain mandatory elements of the articles (prescribed by statute), whereas a shareholders’ agreement is essentially a private contract, so it\u2019s much more flexible.<\/p>\n

Since the shareholders’ agreement is a private agreement, it remains confidential between the parties involved – whereas the articles of association is a public document which must be filed with Companies House.<\/p>\n

Another difference is the manner in which the rules are decided: a shareholders’ agreement normally requires 100% of shareholders to agree any changes to its contents, as opposed to the statutory 75% for the articles of association.<\/p>\n

Although there are \u201cmodel\u201d (standard default) articles of association<\/a> prescribed by the Companies Act, there is no such model in respect of a shareholders’ agreement.<\/p>\n

What are the main reasons to put in place a shareholders’ agreement?<\/h3>\n

The main reason for putting a shareholders’ agreement in place is to protect the shareholders and the company. For example, if you don\u2019t<\/em> have an agreement in place, the majority shareholders are able to make important decisions that are not necessarily in the best interest of minority shareholders. Decisions that should include everyone might be about the appointment\/removal of directors, issuing of new shares, etc.<\/p>\n

Another advantage of having the agreement is the flexibility that it offers in comparison to the basic constitution, as no standard form exists for shareholders’ agreement. Furthermore, because it is a private document, commercially sensitive information can be included.<\/p>\n

How do you implement a shareholders’ agreement and when is the best time to do so?<\/h3>\n

The ideal time to put a shareholders’ agreement in place is when you start the company. Fallouts between shareholders can happen – but if the agreement is implemented from the start, disputes are limited by the rules already agreed.<\/p>\n

If you already have an existing company, but never got around to implementing an agreement, it\u2019s not too late! In fact, when new shareholders come on board, this can be a good time to implement a shareholders’ agreement.<\/p>\n

It is always advisable to enlist a solicitor or an accountant to help set up and manage the agreement. Although there isn\u2019t a legal requirement to do this, the benefits of having a comprehensive document in place is huge \u2013 and although there is generally a cost for doing so, this will potentially be offset by the savings made on avoiding any unnecessary disputes further down the line.<\/p>\n

Alternatively, if you prefer a DIY solution, there are many templates available online, usually for a fee. A template will help you compile the contents of your agreement in a step-by-step way.<\/p>\n

If you decide to purchase a template, there are considerations worth thinking about, so you can choose the right template to suit your organisation. These include:<\/p>\n