If your company has more than one shareholder you need a shareholders’ agreement. This post outlines what they are, why you need one, when you should put one together, how to do it, and what it costs.

What is a shareholders’ agreement?

A shareholders’ agreement is a private, legally binding contract between a company’s shareholders. It should provide robust and fair rules to help you manage your business by dictating how shareholders (and directors) should behave in certain common situations. Despite how frequently these situations arise, UK company law does not provide solutions by default. The common situations a shareholders’ agreement can help with are:

1. Protecting the interests of shareholders. The agreement should harmonise the interests of all people involved, whether family and friends or investors. It should protect the rights of all whether they are minority or majority shareholders.

2. Defining roles and responsibilities. Your shareholders’ agreement should clarify the rights and responsibilities of each shareholder and distinguish duties as a shareholder versus a director (directors are responsible for day-to-day management; shareholders are not).

3. Decision making and dispute resolution. The agreement should establish clear processes to make important decisions and routes to resolve disagreements or deadlock scenarios.

4. Controlling share ownership. A well drafted agreement prevents shares being sold to unwanted third parties, defines what happens when a shareholder retires, dies or becomes incapacitated and includes rules for dealing with good or bad leavers.

5. Providing financial clarity. Your shareholders’ agreement might specify when and how dividends should be paid to any shareholders, if at all. Without one, there is no obligations for the company to pay dividends at all.

6. Protecting the business and its confidential information. Shareholders’ agreements are private documents. They can help protect sensitive commercial details, such as whether individual (or groups of) shareholders have more rights than others. They’ll often include rules to protect against departing shareholders starting a rival business or stealing clients, staff or commercial intelligence.

Why do you need a shareholders’ agreement?

Although there is no legal obligation for your company to have a shareholders’ agreement, they are worth the investment in time and money because:

• Shareholders’ agreements are specific to YOUR company and shareholders. They can (and should) be tailored to meet your specific needs.
• They are private (unlike the company’s articles of association).
• They encourage you to discuss important matters up front (rather than when it’s too late).
• They create legally binding obligations. Disagreements occur and sometimes people do not keep up with their duties and promises.

Shareholders’ agreements are enforceable as contracts and so can offer solutions and resolutions when things go wrong and relationships sour.

What if a shareholder is an investor? Do we still need a shareholders’ agreement?

Yes, but it might be called something else - like an investment agreement. The difference is that investors tend to want additional rights beyond those that the ‘founder’ shareholders would have. For example, the right to receive regular updates about how the company is doing. Shareholders’ agreements are usually put together as part of a larger transaction (for example, where new shares are being issued in exchange for money).

When should you put together a shareholders’ agreement?

As soon as there is more than one shareholder. This might be on incorporation, or later (when shares are actually issued to someone else).

Who should be involved in putting together a shareholders’ agreement?

Everyone who is (or is going to be) a shareholder or director of the company.

How do you put together a shareholders’ agreement?

Whether you use a lawyer or Robolawyer to help you with your shareholders’ agreement, the process will essentially involve:

1. Considering and discussing the main issues with your fellow shareholders.
2. Drafting the shareholders’ agreement (and associated documents).
3. Digesting and negotiating specifics of each document required until every party is happy and onboard.
4. Signing the documents and dealing with the formalities required to give the agreement legal effect.
5. Knowing when to refer back to your shareholders’ agreement to look up how to proceed if one of the common situations should arise.

How much does it cost to put together a shareholders’ agreement?

Lawyers with experience doing this type of work will charge at least £1,500 plus VAT. This can commonly rise to over £3,000 plus VAT, even for a fairly standard agreement.

You could use a free template that you find online, but we don’t recommend it.

You can also use Robolawyer to put together your shareholders’ agreement for a fixed price of £399 plus VAT. This price includes everything required to get the job done. There is no easier or more cost-effective but reliable way!

Now what?

Read our full guide to find out more in excruciating detail, or check out our fixed price shareholders’ agreement product here which guides you through each step mentioned above.