5 Reasons Your Company Should Have a Shareholders’ Agreement

In business, unpredictability is the only real certainty; but, a shareholders’ agreement can provide stability and clarity to help mitigate this. At Hibberts Solicitors, our shareholder agreement solicitors explain why having a robust shareholders’ agreement is essential for your company.

1. Mitigating Disputes Before They Arise

Disagreements are part and parcel of any business venture. However, the impact of these disputes can be mitigated through a well drafted shareholders’ agreement. It serves as a pre-agreed route to resolving conflicts, thus avoiding the potential for expensive and time-consuming litigation. By setting clear parameters for conflict resolution, a shareholders’ agreement ensures that all parties know exactly how disputes will be handled, fostering a more harmonious business environment. It also goes without saying, that it is much easier to agree on how a dispute will be handled when all parties see eye to eye. Waiting until a dispute has arisen, only serves to make resolving the dispute more difficult.

2. Clarifying Management and Decision-making Processes

The delineation of management roles and decision-making authority is crucial for the smooth operation of a company. A shareholder has little to do with the management and day to day running of a company. This is left to the directors.  However, a shareholders’ agreement can specify that certain decisions require shareholder consent, thereby preventing any overreach by the board of directors. This clarity not only streamlines business operations but also gives shareholders control over key company decisions, aligning with the company’s strategic objectives.

3. Protecting Minority and Majority Shareholders

A shareholders’ agreement provides safeguards for both minority and majority shareholders. With mechanisms like “tag-along” and “drag-along” rights, the agreement ensures fair treatment when it comes to major transactions, such as the sale of the company. These provisions protect minority shareholders from being left out of lucrative deals and enable majority shareholders to sell the company without obstruction from minority interests.

For a minority shareholder in particular, a shareholders’ agreement can provide a right to appoint a director to the board of the company. A shareholder with 50% of the shares or less, would not ordinarily be able to appoint a director without support from other shareholders, meaning that minority shareholders risk being unrepresented at board level. A shareholders’ agreement can address this.

4. Regulating Share Transfers

The transfer of shares can lead to unwanted changes in company ownership. A shareholders’ agreement can stipulate restrictions on share transfers, granting existing shareholders the right of first refusal where a shareholder wishes to sell their shares. This pre-emptive measure ensures that shares are offered to existing shareholders before being sold externally, thus maintaining the desired ownership structure.  Conversely, a shareholders’ agreement can also provide a mechanism for ensuring that shares belonging to a shareholder who leaves the business, are returned to the company or other shareholders. These compulsory transfer provisions ensure that only those who work in the business, have a stake in it.

5. Setting the Foundation for Business Stability and Growth

A shareholders’ agreement is more than a legal necessity; it’s a strategic tool that lays the groundwork for business stability and growth. By addressing potential issues proactively, it helps in attracting investment, securing financing and establishing a clear roadmap for future operations. The agreement demonstrates to investors and financial institutions that the company is well-organised and prepared for various potential issues that may arise.

In conclusion, a shareholders’ agreement is a vital component of your business’s governance framework. It not only provides a safety net in times of internal conflict but also strengthens the company’s operational and strategic posture. At Hibberts Solicitors, our dedicated team of corporate and commercial solicitors is committed to drafting agreements that are tailored to your business’s unique needs, ensuring that you are well-prepared to navigate your way through problems, which in turn allows you to focus on running the business and making it a success.