This sort of agreement is optional and states precisely the shareholders right, their obligations to the company and the relationship between them. Though the Companies Act 2006 and the articles of association covers this issues to a certain point, a shareholder’s agreement specifies the specific duties and right of a shareholder which to a larger extent isn’t covered in the articles of association.
Yes and no. It isn’t legally required for companies limited by shares to have such an agreement or file a document like that with the Companies House. Nevertheless, it is something that must be carefully considered if the shareholders of a company are more than one. It is needed more especially when the shares of the shareholders in the company are not equal.
An agreement like this will help protect all the shareholder right, not minding if they hold majority, minority or equal stake in the business– however it is especially valuable for minority shareholders who need protection from the voting powers of those majority that might be possibly unfavorable to them.
Normally, you ought to put in place a shareholders’ agreement immediately your company gets incorporated and the first set of shares gets issued. This is the most ideal approach to ensure the interests and rights of the initial members and any individuals who join the business after its incorporation, irrespective of the value of their stake in the company is protected. Do not make the mistake of assuming all things will continue to be okay simply because you are setting up the business with family, people you presently have a wonderful relationship with or friends.
Anything can turn out badly in business, therefore it is better to begin on a good track and put in place a shareholders agreement, and peradventure a disagreement comes up. And, they most likely will! You must really protect other members and yourself by putting in place clear guidelines and rules when the going is rosy. Going into a shareholders’ agreement will help you solve issues rapidly and easily in a helpful and favourable way. Also, it could keep a wonderful relationship from going bad.
A shareholders’ agreement works hand in hand with an organisation’s articles as a practical system to govern and regulate the inner administration of the business. Some of the well-known and vital issues a shareholders agreement can and should cover include:
Changing a shareholders agreement is a lot easier than that of the articles of association. It can be modified whenever and there is no compelling reason to reveal the report to anybody other than the companies’ members.
Minority shareholders will gain much from a shareholders agreement. Except given protection by an agreement like this, the powers of the minority shareholders to vote (i.e. those who own less than 50% of the issued share capital of an organisation) can be vetoed by the voting strength of the majority. This simply means their votes are basically useless when decisions require the vote of majority as opposed to a unanimous vote. This can result in the majority having the capacity to make significant changes and key decisions without the approval of other shareholders.
Moreover, an agreement can only be changed when all the shareholders approve it, while the articles can be changed by a 75% majority. This action can be unfavorable to the minority if they do not concur with the changes made to the articles.
The majority shareholders have a tendency to gain more when there is no agreement in place. They hold most of the shares and voting power, therefore the majority rule, so they can do just about anything they like. Nevertheless, they have little power to really compel the minority to offer their shares or keep them from selling to the wrong individual. This is the point an agreement can be truly useful to major shareholders.
Drag along rights can be incorporated into a shareholders’ agreement to compel the minority to sell their shares if a reasonable offer has been made to the majority. Basically, the majority can simply ‘drag-along’ the minority to prevent being caged and not able to sell due to the minority reluctance.
A guideline on the share transfer restriction can be incorporated to avert a troublesome or stupid minority shareholder from selling shares to a wrong outsider or adversary; nevertheless, this is advantageous to all shareholders, as against only the majority. The most ideal approach to deal with the sale/transfer of shares is to think of a reasonable and efficient set of guidelines concerning when they can sell share and to whom.