When forming or operating a private limited company, there are a number of steps that can be taken in order to protect yourself and the other parties involved. Perhaps the most effective step is the implementation of a shareholders’ agreement that is suitably tailored to your business.
What is a Shareholders’ Agreement?
A shareholders’ agreement is a private contract made between a company and its shareholders that sets out how the company should be operated. It may be entered into at any time of a company’s life cycle, not just on incorporation of the company or where a new shareholder joins.
Why have a Shareholders’ Agreement?
There is no legal requirement for a shareholders’ agreement. However, we would recommend that one is adopted for any company with more than one shareholder for the following reasons:
- Preserve confidentiality: a shareholders’ agreement is not required to be filed at Companies House, as opposed to the articles of association which are publically available. This is helpful where certain provisions are commercially sensitive and are to be kept private.
- Protect shareholders’ interests: a shareholders’ agreement can provide clear and detailed non-compete and confidentiality provisions which will afford the parties with much greater protection than relying on the default position at law.
- Provide certainty: a shareholders’ agreement formally records the parties’ aims and objectives. This clarity can be critical to set out what would happen if certain material events were to occur, such as the death or incapacity of a shareholder, or if the company was ever sold or liquidated.
- Promote a smooth operation: the shareholders’ agreement will set out how key decisions are to be made and what level of shareholder approval may be required for a particular action. Generally such provisions would not be found in a company’s articles of association.
- Resolve disputes effectively: a shareholders’ agreement can contain an agreed process for resolving disputes or a deadlock, rather than each party resorting to costly litigation.
The above list is not exhaustive, and there will be other advantages available depending on whether you are a majority shareholder, a minority shareholder or an investor. In our view, a relatively small investment in terms of legal cost is most definitely worth the benefit of certainty and protection that a shareholders’ agreement provides.