Title: The benefits of a shareholder agreement
Date: 01 July 2008

The internal management and administration of a company is governed by the Articles of Association, a document that is filed at Companies House and is open to public inspection.   Shareholder agreements supplement these and have a number of advantages. 

They are governed by contract law and may be amended and ended by simple agreement.  In addition, provided they do not make any amendments to the Articles of Association, the agreement remains confidential between the shareholders and so may deal with arrangements they wish to keep between themselves. 

Shareholder agreements have a number of uses for smaller companies.  For example, they can document arrangements for:

  • initial funding and subsequent financing of the company, the frequency with which management accounts will be circulated
  • shareholder guarantees given to third parties,
    undertakings for confidentiality
  • covenants not to compete with the company
  • shareholders warranties and indemnities to incoming shareholders.  An investing shareholder may wish to limit the debt that may be incurred by management without his or her consent or the sale of business assets with such consent.

Shareholder agreements can also be used to protect the position of minority shareholders who may not have sufficient protection under corporate law.  In addition, they may deal with shareholder exit arrangements including rights of first refusal for the remaining shareholders. 

Shareholder agreements can also contain details of how shares will be dealt with in the event of a shareholder's death or divorce, including the financing and timing of a buy-back of the shares.

In the event of a dispute between the shareholders the agreement may provide for the dissenting shareholder to be bought out by the other shareholders and in the event of substantial disagreement for the winding up of the company.

Shareholder agreements are very useful tools for setting out the more practical aspects of a company's internal arrangements.  They can provide clarity for shareholders about the procedures for acquiring and disposing of shares.  A well drafted shareholder agreement can help prevent disputes from arising and, in the event that they do arise, can help provide a swift resolution.

We can advise you on how your company might benefit from a shareholder agreement.

For further information, contact Paul Hollyer on 01246 231 288.

Disclaimer

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published.

Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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