Shareholders’ Agreement – What They Are & Why They’re Used?

As a business owner or shareholder partner, planning for the worst possible scenario can never be underestimated or taken for granted. As in all businesses, changes will inevitably happen and with that comes the possibility of disagreement and sometimes even conflict between the owners, management, directors or partners of a company. It’s important to make sure that your shares and ownership of a company are consolidated and guarded, should an action arise that requires your power being exacted or enforced.

Having a shareholders’ agreement in place allows you to carefully plan against any circumstance that questions the shares, ownership or major decision-making in a business. What a shareholders’ agreement does is effectively and legally grant the protection to anyone who is a shareholder of a firm or business should a negative scenario happen that affects the ownership or profit shares of a company. If you’re already in business with others, or are looking to enter a business partnership, it’s highly recommended to put a shareholders’ agreement in place for the long-term stability and health of a business as well as your assets.

Nordens’ Client Co-ordinator Manager, Natalija Rynkevic, explains the dynamics and vital relevance in obtaining a shareholders’ agreement for control of your business. She also touches upon how Nordens’ bespoke and high calibre shareholders’ agreement service can build and execute a binding, legal agreement based on exactly what the client requires.

What is the main purpose of a shareholder agreement?

A shareholders’ agreement is a contract signed by all, or some, of the shareholders in the company which essentially sets out how the shareholders want the company to be run and governed. Shareholder agreements basically protect the shareholders of a company, no matter how much stake they have, granting what extent they are involved as well as determining how much power is given to the directors to run the company.

In many cases it is usual to combine the use of a shareholders’ agreement with a specifically drafted set of articles of association for your company which is normally in place before a shareholder agreement is drafted. Shareholders’ agreements are most commonly used as a safeguard tactic, giving protection to shareholders in the case for whatever reason things go wrong.

Are shareholder agreements specifically intended to protect just minority shareholders? 

Not at all, shareholder agreements are designed for all parties no matter what stake they have in the particular company in question. Let’s say for example, a majority shareholder or founder of a business may discover that a minority shareholder no longer who is no longer working within the business, wants to sell their shares. There is no principle, or agreement in place, to say that those shares can’t be sold to an outsider or, even worse, a competitor. A shareholder agreement protects against this scenario happening and ensures your business is secured against any potential detrimental effects arising related to conflict between shareholders.

A shareholders’ agreement can be taken out by anyone involved in the share of a company, who wish to protect their assets as well as any further bespoke aspects of the agreement which are not covered in the articles. There have been countless times over the years where people have started a business with friends or personal relatives and haven’t considered protecting their interests in the company, believing that a strong bond of trust as well as the articles of association are the only foundation needed. The articles of association may not offer a shareholder full protection and in many cases you could be stung by a scenario, or a person that previously was never considered.

What does a shareholder agreement guarantee for the person or persons who enter it? What are the different types?

An agreement can provide clarity and insurance for many possible sequences of events including the financing of a company, the management of a company, the dividend policy, the procedure to be followed on a transfer of shares, deadlock situations and valuation of the shares. 

The absence of a shareholders’ agreement opens up the prospect for disputes and disagreements between the shareholders. Shareholders’ agreements contain provisions that predict and cover disagreements, drawing up applicable and sensible ways for disputes to be addressed and rectified.

As no two companies can have identical relationships between their shareholders, there is no standard template or ‘one size fits all’ for a shareholders’ agreement. This means that should you wish to acquire a shareholders’ agreement; we will work closely with you to tailor the specific requirements to your ideal preference meaning you’re totally covered and comfortable with the arrangements in place.

Are shareholder agreements a lengthy and expensive process?

This is all dependent on the fine tuning of a particular shareholders’ agreement in terms of the particular options you wish to be covered on. One thing is for certain though, the price of a shareholder agreement is significantly cheaper than a court proceeding following a dispute regarding the governance of the company with the other shareholders. Having the shareholders’ agreement in place legally safeguards your assets and involvement in the company, should any lawful action be enacted by other parties of the business. 

Most shareholders’ agreements are a very quick and simple process, with the person knowing exactly what they want, and the level of protection needed and when. With our team of highly qualified solicitors personally working with you every step of the way, you can be safe in the knowledge that your concerns will be attended to with care and assurance.

Are there any disadvantages to entering a shareholder agreement?

There are virtually no disadvantages to protecting yourself against any negative scenarios that may arise with other shareholders. In the same way an insurance policy is seen as a highly positive action taken to cover you, defending and preserving your share in a business gives you peace of mind if certain eventualities take place.

Our top-quality shareholders’ agreement service will guide you through every stage of the process with due care and attention, advising and consulting you where needed so that you’ll be highly satisfied with the agreement officially consolidated in place.

We’re now offering complimentary strategic consultation sessions up to 30th June 2021. Please contact Nordens’ Director of Strategic Consultancy Joe Sword at js@nordens-strategic.co.uk or 020 8530 0720.

If you’d like to know any further information on our shareholders’ agreement service, or anything accounting, strategic or corporate finance related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.