Jaspreet Patter, corporate solicitor in the corporate and commercial team at IBB Solicitors, discusses the importance of shareholders' agreements and what they should entail. For more information please visit: http://www.ibblaw.co.uk/service/corporate-and-commercial
WHAT IS A SHAREHOLDERS' AGREEMENT?
A shareholders' agreement is a contract entered into between a company and some or all of its shareholders. The purpose of such an agreement is to govern the relationship between the parties including personal rights and obligations of shareholders. Together with the articles of association of the company, the two contracts create internal rules by which the company, and shareholders have to abide by.
WHY WOULD MY COMPANY NEED A SHAREHOLDERS' AGREEMENT?
It is prudent to put a shareholders' agreement in place from the outset, i.e. as soon as the company has been incorporated or has started to trade, as it is easier for the parties to agree and focus on such matters at this stage when they have the time as opposed to when the business is up and running. The whole point of the agreement is to avoid disputes in the future and should they arise the agreement would determine how such dispute is to be resolved. This is much quicker and easier option than trying to negotiate a settlement on the occurrence of dispute.
WHAT OTHER CLAUSES WOULD A SHAREHOLDERS' AGREEMENT TYPICALLY INCLUDE?
There are no hard and fast rules about what the agreement should or should not contain. The agreement can cover any matter that the shareholders' wish to address. Other common provisions include deadlock, drag along and tag along on the sale of the company, and non-compete restrictions on shareholders. Overall a shareholders' agreement is fundamental to the functioning of a successful business and governance of internal rules as it resolves any ambiguity over present and future management of the business. It also has a deterrent effect, as having one in place from the outset not only resolves disputes, but deters any hostile shareholder from creating any frivolous claim or dispute.
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