3 Things to Consider in a Shareholders Agreement

Often small business owners are so busy getting their new adventure off the ground that the creation and signing of a shareholders agreement takes a back seat. Some entrepreneurs even put off getting proper legals in place until problems arise, at which point it can be more difficult than ever. Getting a proper shareholders agreement in place is not just important for resolving disputes, it can also set out the ground rules for everyone to follow early on, so that people know where they stand and how to behave. This can have the effect of avoiding disputes from arising in the first place. Here are some things to consider in any shareholders agreement.

Actions requiring approval

As some things are so important to a company that it cannot be simply entrusted to the management, a list of things should be drawn up that the management of the company is not able to do without the prior approval of the shareholders. This might be for example the declaring of and payment of a dividend, and for example the amending of any constitutional documents related to the company such as the memorandum and articles of association. This list of things is set out in a schedule attached to our standard shareholders agreement template.

Right of information

Naturally shareholders may want to know much more about the ongoing running of the business than just the statutory accounts each year. Without an agreement in place, the management are not necessarily under any obligation to share information about the company and its progress to shareholders. Therefore it’s important that as part of the drawing up of a shareholders agreement, it is stated specifically what information the shareholders have a right to receive. This may include for example quarterly management accounts within a specified time period after the end of the period, the annual budget and/or forecast, and minutes of all management meetings. Our standard shareholders agreement template specifies a range of such information that the shareholders have a right to receive (including when it should be provided).

Buying/shelling of shares

Most shareholders and managers want to know that they are not going to be forced in to a situation against their will or ripped off by another shareholder. This could happen for example if a majority shareholder sells their stake to a ‘bad’ third-party that subsequently behaves in a hostile manner, or for example a controlling stake gets sold and leaves the remaining shareholders with a substantially different company by virtue of the transaction, such as in the event of a merger or acquisition. Therefore, as with our shareholders agreement template, it’s useful to agree between shareholders on things like what the time period is before transactions are allowed, what rights of co-sale other shareholders have on the sale of other shareholders’ shares, and what right existing shareholders have in the event of new share issues.