Do I Need A Shareholders' Agreement?

• Published date: 17 June 2021
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law, Shareholders
• Law Firm: RFB Legal
• Author: Attila Hunter

Attila Hunter of our Corporate and Commercial department sets out the reasons why shareholders in a business should consider putting a shareholder's agreement in place and how it may help the running of the business.

Attila Hunter of our Corporate and Commercial department sets out the reasons why shareholders in a business should consider putting a shareholder's agreement in place and how it may help the running of the business.

What is a shareholders' agreement?

A shareholders' agreement is a private agreement made between the shareholders of a company. Its purpose is to govern how the company is run, protect shareholder investments and establish the relationship between the shareholders. The agreement can be entered into by individuals, corporate bodies or a combination of the two. Essentially any group of shareholders can enter into a shareholders' agreement providing its terms are agreed between the parties.

When may a shareholder's agreement be useful?

A shareholders' agreement may be useful for two or more individuals who have an equal shareholding in a company and wish to set out the decision making process in the event there is a deadlock in shareholder decisions. A shareholders' agreement may also be useful when two or more individuals have an unequal shareholding in a company and wish to introduce majority or minority protection rights. Shareholders may also look to enter into a shareholders' agreement when they are setting up a joint venture and wish to stipulate each company's obligations in a binding document.

What you may find in a shareholders' agreement?

A shareholders' agreement is a private document and can therefore contain such clauses as the parties may agree. Typical provisions that would usually be found in a shareholders' agreement include;

Object and scope - this is useful to ensure that all parties agree on what the company or joint venture has been set up to achieve and provides something for shareholders to point to in the event the company or joint venture appears to be heading in a different directions as what was originally agreed.

Dividend policy - this sets out the dividends that should be paid to shareholders. Dividends can only be paid from a company's clear profits and the value attributable to them is usually decided by the company directors. However, a shareholders' agreement may contain a clause which states that a minimum percentage of the company's clear profits is to be paid to the shareholders by way of dividend...