Shareholder Agreement

When setting up a business, individuals place their rose-coloured glasses over their eyes, presuming nothing can go wrong. They wholeheartedly trust prospective partners, and therefore, would never need a legal document to protect their interests or govern their relationships with investors. In fact, they may think that any mention of a shareholder agreement will alienate the trust they have earned from prospective business partners.

Unless you possess the ability to see the future, it is essential to obtain a Shareholder Agreement.

However, if you would enjoy, ending up with nothing after years of investing time, spending money on a drawn out costly legal battle,  potentially destroying friendships in the process, then do not read further.

What is a Shareholder Agreement?

A Shareholder Agreement acts as a safeguard of interest. It is ultimately a contractually binding agreement, acting as material evidence to ensure shareholders comply with its provisions.

Cost: ranging from £400 – £1000

They typically outline:

  1. Shareholder rights and obligations.
  2. Procedures for the running of the company.
  3. Policies for the sale of shares.
  4. Provisions for protecting minority shareholders.
  5. Processes for decision-making.

Although a Shareholder Agreements provisions depend largely on the level of shareholding, it is advisable to obtain them regardless of your minority or majority share status.

When is the best time to get a Shareholder Agreement?

It is often best to strike whilst the iron is hot. Consequently when you form a company, and issue the first ratio of shares, it is advisable you have a shareholder agreement in place.

Relevance to Start-ups

The majority of new businesses comprise individuals, who have relationships outside the realm of the company. They could be family members, friends, partners, or just acquaintances. Due to the long relationships these individuals often have shared, founders find it difficult to consider the legal implications of starting a business. On the flipside, once investments are made in the start-up, it is absolutely pivotal that new shareholders’ agreements are drawn up to govern the new shareholder’s relationship with the old.  

Although there is no such a thing as a universal shareholder agreement, a start-up’s shareholder agreement should deal with a complex number of issues, tailored to the specific circumstances and parties involved.

Key considerations for a start-up company’s shareholder agreement, about to receive a capital investment, are as follows:

  • Unanimous v. Non-unanimous Shareholder Agreement:
    1. Unanimous: where a company has a small number of shareholders, it is common for all to become party and have equal responsibility.
    2. Non-unanimous: where more shareholders are active, a unanimous shareholder agreement may become impossible to manage, due to the sheer volume of investors, and different ratios of share ownership. Indeed, minority shareholders may be left out of the principal agreement (between majority shareholders and the company) and thus must make an agreement with the business separately.
  • Management of the Corporation:
    1. Board of Directors: a shareholder agreement should lay out the limited size of the board and the manner in which members are elected.
    2. Observer Rights: investors, who are not elected to the Board of Directors, may seek to have rights to attend Board meetings. These should be laid out in the shareholder agreement.
    3. Procedural Matters: elements of a shareholder agreement normally outline frequency of board meetings, the processes by which meetings can be called, and the minimum percentage for attendance.
  • The Covenants of Corporation:

Investors often require a cogent policy of information-sharing obligations and the operation of the corporation (audits, publication of financial documents) within a specific timeframe.

  • Share Management

A shareholder agreement should outline the transfer of shares, permitted share transfers, right to repurchase, pre-emptive share rights, and right of first refusal.

This article provides a glimpse into some of the complexities surrounding a shareholder agreement. Please do not hesitate to reach out to us, book a free consultation with one of our legal advisors and utilise our lawyers diverse experience. We will make a free assessment of your business’s legal needs and provide you with expert advice on the best possible shareholder agreement to protect your company’s interests.