‍What is a shareholders’ agreement?

A shareholders’ agreement is a bespoke document, that will be different for the needs of every business. It outlines the rights, responsibilities, and obligations of shareholders, and the relationship between shareholders and directors. A shareholders’ agreement acts as a contract between the shareholders who sign it, requiring them to reach a consensus over their rights and responsibilities. They must also decide how the company handles certain situations that may arise, such as shareholder disputes or share transfer processes.  

Is this the same as my articles of association (constitutional documents)?

The contents of a shareholders’ agreement may seem similar to a company’s Articles, but they are very different for the following reasons:

Articles:  

• Made available to the public and are uploaded to Companies House.  
• Require more formal procedures for amendment.  
• Governed by corporate law in the UK and any breaches can result in penalties or legal action.

Shareholders’ agreement:

• A confidential document among the parties who sign it.
• Can be changed by an agreement between the parties.  
• A private contractual document between certain parties, any breaches will be dealt with by contract law between the parties that have entered into the agreement.

Founders' agreement vs. Shareholders' agreement – what's the difference?

Let’s start off with one of the most common misconceptions in the startup world. Many founders are told they need to get a founders’ agreement when they first start out on their startup journey. Let’s not confuse things. A founders’ agreement is basically your company’s first shareholders’ agreement and is often used when the company is not incorporated. It can be used if your company is incorporated, but if you have two or more shareholders, you should really get a shareholders’ agreement.  

This article delves into the key elements and advantages of having a comprehensive Shareholders' Agreement, highlighting why it is crucial for business stability and success.

Why should I use a shareholders’ agreement?

Most investors will require all shareholders to enter into a shareholders’ agreement in an agreed form. They want this as it protects their interests as future shareholders. After all they’re investing money so want to make sure their rights are protected. You also want to ensure that your interests are protected as founders (and shareholders) of the company.

This is important alone, but there are some other points you should consider.

Mitigates when things go right or wrong

Having clearly defined rights and obligations lowers ambiguity, which leads to potential disputes. Disputes are very expensive, legal fees often start in the thousands. You want to make sure that you have an agreement in place which clearly sets out what happens when things go wrong, when things go right and so forth.  

Take for example you want to sell the company to a buyer, and you have the majority shareholding, but a group of shareholders don’t want to. A correctly drafted shareholders' agreement can force minority shareholders to sell their shares and allow you to sell your company and cash out.  

Ensures privacy amongst the shareholders and away from public knowledge

Unlike a company constitution, you do not need to make a shareholders agreement public. Additionally, you can include confidentiality provisions within a shareholders’ agreement. This is beneficial as it ensures that the sensitive company information you disclose to shareholders is not shared with third parties.  

A non-compete clause may also boost privacy, allowing shareholders to prevent shareholders from creating companies that directly compete with the company while they are a shareholder. This provision will often remain in effect for some time after the individual ceases to be a shareholder of the company.

Top tips

1. Don’t give away too may share rights to investors or shareholders.  

2. Think about how your board is composed. Don’t give away too many board seats early on. Too many cooks spoil the broth, as they say.  

3. Think about when things go wrong.  What happens if a founder leaves, do they get to take their shares away with them? You want to ensure there are appropriate vesting provisions in your agreement if issuing shares to founders.  

4. Think about when things go right. Make sure you have the room and flexibility to do what you need to do when you want to sell or IPO. You should make sure you outline these processes in your agreement.  

A poor relationship between shareholders can be very bad for business: your company’s performance may suffer, and you may encounter costly legal action if your shareholders have disagreements over their rights and obligations. Having a shareholders’ agreement in place for expectation setting and dispute settlement can be beneficial in preventing these issues from occurring.

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This list is by no means exhaustive and aims to give you an overview to kick off your business. For specific, bespoke support please book some time with one of our experienced lawyers for a competitive upfront fixed fee.