Shareholders’ Agreement – do we need it?
Many shareholders of a company enter into a shareholders’ agreement with each other as to how they will behave in respect of their company. However, the agreement is widely disregarded by many businesses as it is not a legal requirement. Some shareholders believe that nothing will go wrong in the future. Many shareholders consider an agreement unnecessary, as they could rely on their close friendship with other shareholders, to solve problems. Some shareholders also feel that if the provisions in an agreement, could also be included in the company’s articles of association, then why the need for a shareholders’ agreement? This article will explore what a shareholders’ agreement is and whether or not it is needed.
What is a Shareholders’ Agreement?
A shareholders’ agreement is a private contract between the shareholders of a company that creates legally binding obligations between shareholders. The agreement provides clarity on important matters that affect shareholders, such as their duties, and how disputes are to be resolved, for example. A shareholder does not have to enter into an agreement. If a shareholder enters into an agreement he must do so without compulsion. Agreements are not regulated by the Companies Act 2006, so there is no legal process under the CA 2006, to alter the agreement. Therefore, most shareholders’ agreements will normally state that all shareholders, who are a party to the contract, must give consent to amend it.
Do I Need a Shareholders’ Agreement?
Friendships with other shareholders could deteriorate without a well drafted agreement, resulting in expensive litigation. A minority shareholder can have more control in the running of a business, under an agreement, as all parties to the contract, must agree to an amendment. A shareholders’ agreement can include a shareholder’s personal rights which are contractually enforceable, for example, the right for a specified person to be appointed as a director. By contrast, if this right was included in the company’s articles, it would not be contractually enforceable under section 33 CA 2006. An agreement also allows for commercially sensitive information to be included, as it is a private document. The impact of Covid-19 has necessitated the need for a shareholders’ agreement. The pandemic has initiated changing circumstances for business owners, such as cash flow problems, a desperate need for investment, shareholders becoming incapacitated due to Covid-19. A shareholders’ agreement is essential as it can be tailored to suit the needs of the business and cover a myriad of situations.
A shareholders’ agreement is a crucial document that legally binds all parties and can avoid potential conflict between shareholders, especially as the company’s articles of association, do not provide adequate protection. Obtaining a bespoke shareholders’ agreement from MLS will ensure the effortless running of the business and provide it with the best chance to flourish financially. It is imperative that every company has a shareholders’ agreement, or an updated agreement, that grows in harmony with the business, and takes the impact of Covid-19 into account.
This article is for informational purposes only and does not constitute legal advice. Contact us today on 02144 478 730 to book your free, no obligation, consultation.
Author: Niresh Naidoo