What is a Shareholders Agreement – A Beginners Guide

This video, hosted by JPP's Managing Partner Mark Glenister, answers the question "What is a Shareholders Agreement?" It explores why you should have one and what it can do for your business.

If you are setting up a business with others or, your business is growing and you are bringing in new people and investors you will need a shareholders agreement.  JPP Law will help you to create an  agreement which will clearly  lay out the rights and responsibilities of all parties. We can advise you on how best to make responsibilities clear, manage risks and prepare for a profitable exit.

Fixed Fee Shareholder Agreements 

JPP Law offers fixed price shareholders agreements. If you would like a no obligation quote, please book your free consultation with a member of our legal team.  During the call the solicitor will talk to you about your requirements and then follow up the call with a written fixed fee quote.

No Sound? Read the video transcript.

Just think of a shareholders agreement as a rule book for running the business in good times and bad.  It’s a contract between the shareholders and a company.  It can be linked to the business plan and contains mechanisms for avoiding disputes and dealing with them cost effectively. The need for a shareholders agreement often comes into focus as the business grows beyond the founding shareholder or shareholders. Of course, all Limited Companies have Articles of Association and they can be amended to cover many of the things which usually appear in a shareholders agreement. However, the Articles of Association are a public document and most businesses want to keep some of their arrangements confidential.

So, what are the founding shareholders usually concerned about? In a word, it’s ‘control’. At the early stages of a business it’s easy to lose sight of the fact that it’s the directors not the shareholders who run the business.  The founding shareholders should definitely consider protecting their own interests by putting in place a shareholders agreement before they own less than 75% of the shares in the company and before they are outnumbered on the Board of Directors of the company. So why is it so important at this moment?  Well a Board of Directors decides things as a majority.

What things should a founding shareholders want to retain control over as the business grows and outside directors and shareholders join the business?  The sale of existing shares by the shareholders or the issuing of new shares to new shareholders by the Board of Directors. Also stopping departing shareholders competing with the business for its existing clients, prospects and key members of staff.

While the founding shareholders remain the majority, they will want to be able to force the minority shareholders to sell if an interesting offer comes their way.  Equally as they move towards being the minority shareholders they will want to ensure that they are included in any sale by the majority shareholders.

Founding shareholders will want to include clear rights of veto in the shareholders agreement over things which are fundamental to the business so that the Board of Directors can’t decide on their own without getting prior shareholder approval.  Equally if the company has equal numbers of founders who are also directors they should think about including anti-deadlock measures within their shareholders agreement.

So if deadlock can be bad for a business what happens if things really go wrong?  What should the business do if a shareholder director dies or becomes too unwell to work in the business? Or is made bankrupt? There are a number of choices to be made, should the shareholder or the deceased shareholders estate be forced to sell shares to the other shareholders? If so, at what price? Should the shareholders put in place life insurance in advance to fund the purchase of shares in these situations? Or should the unwell shareholder or his estate be able to keep his shares?  These are all the kinds of things that need to be thought through thoroughly. How do the other shareholders feel about being in business with perhaps the widow or widower of one of their former shareholders?  How would they feel if one of the shareholders can’t regularly come to work and perform his or her usual duties?

And finally a good shareholders agreement should contain a mechanism for dealing with disputes. The better the shareholders know each other the more they need a robust shareholders agreement. It’s often much more difficult for close friends, close colleagues and family members to resolve disputes rationally than it is for people who are simply in business together.  That’s why the better the shareholders know each other the more important it is that they have a Shareholders Agreement.

Related Content 

Is a Shareholders Agreement Template a Safe Choice for your Business?

Shareholders Agreement UK 

Seven Reasons to Review a Shareholders Agreement

Shareholder Agreements for Startups 

Creating a Shareholders Agreement – 18 Questions to Answer

Do you need a Shareholders Agreement?

What is a Shareholders Agreement and Why is it so Important for a Scale Up Business

What is a Shareholders Agreement

Mark Glenister

Introductory Call

This meeting is an introductory call with Mark Glenister to discuss any legal advice requirements you may have.

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