What is it?
As the name implies, this is an agreement between the shareholders of a company. It sets out the relationship between shareholders and how the company should be run to a certain degree. The Shareholders Agreement should work in tandem with the company’s Articles of Association.
Do I need one?
No, not if you are the only shareholder in your company. At a later date, if you want to bring in investors or form a new partnership then you can always make a Shareholders Agreement at that point. If you have more than one shareholder, or intent to have more than one after your incorporation, it is highly advisable to have an agreement in place. The agreement create certainty within a company and helps to avoid disputes and the costly litigation that can follow.
What about if I’m starting up with friends?
At the moment you may be able to reach an agreement quickly with your friends on business matters, but in the future it might not be so smooth. What if with the revenue from your latest completed assignment, you think the company should invest in upgrading your vehicle(s) but one of your partners thinks that the money should be used for advertising and the other partner thinks that the money should be used for staff bonuses. Maybe you can talk them around to see things your way, but how inefficient is this when you have your core business to be getting on with. It also doesn’t take into account the opinions and expertise of others in your company such as any investors or analysts that you might have. A Shareholders Agreement will include a method for resolving differences in opinion, this process should involve all the relevant people and ensure that a suitable decision is made. Without a shareholders agreement, one of your other directors could just go right ahead and use the company’s money for advertising or staff bonuses potentially without telling you.
Roadblock to financial support
If you don’t have any shareholders at the moment but are looking to attract some, or looking to gain financial support from a bank, one of the first questions you will face is ‘can I take a look at your company’s Shareholders Agreement?’ Anyone considering putting money into your company is going to want to some assurances that their money will be used in a sensible way and not just frittered away. Investors will also want to be sure that the company is being properly led and is working towards making a profit. Your company being profitable is the only way investors make a return on their money.
So imagine that you have started a company with someone who turns out to be dishonest. Someone who has used company money for something other than company business. It is very hard to work with someone who you don’t trust. What do you do?
You started the company together, you don’t have the power to sack them. Even if you manage to convince them to leave the company you can’t force them to relinquish their shares. If you carry on the company you will have to pay this person a dividend from your profits every year. If you have a clause in your Shareholders Agreement however, you would be able to force a dishonest person out of your company. This would prevent the need for you to wind up the old company and start a new one from scratch.
There are dozens of scenarios where disputes can arise between directors and major shareholders. If you don’t have a legally binding agreement in place, you could be faced with having to part company with the business you have worked so hard to build up, needing to start all over again going it alone or with new partners.