3 Key Reasons to Have a Shareholders Agreement

January 30, 2024

3 Key Reasons to Have a Shareholders Agreement

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By Siobhan Williams

It’s not compulsory to have a shareholders’ agreement, but where a company has more than one shareholder, we would always recommend having one put in place in order to regulate the relationship between shareholders and how the company will be run. Our corporate law experts have outlined 3 reasons why it’s beneficial to put a shareholders’ agreement in place:

 1. Decision making & shareholder protection

The board of directors will usually have the day-to-day control of a company, and it can be important that the directors are able to make decisions quickly in order to be flexible and react quickly to the cut and thrust of business. However, there are often some decisions that are reserved for the shareholders to make – typically these will relate to key issues such as any decision to take on significant borrowing, to divest a company of part of its business or assets, or make key appointments in the business.

In addition to setting out a list of matters which are reserved for the shareholders to consider, it is also important to agree the decision-making threshold for such decisions to be taken. For example, do you want some decisions to be taken only if the shareholders holding 60% or more of the shares (or voting rights) vote in favour of it? Do you want to have higher thresholds for some decisions and a lower threshold for others?

There is often a balance to be struck here between:

• protecting minority shareholders to ensure that they have a say on decision-making
• reflecting a majority shareholder’s position in that they are likely to have invested the most in the business, and
• ensuring that the company is not hamstrung

2. Control the transfer of shares

Most shareholders want to agree a certain level of control over when shares are to be transferred, to whom and for what price. The shareholders’ agreement should deal with not only voluntary transfers of shares (for example, when a shareholder wants to sell their shares) but also with compulsory transfers of shares – i.e. when a shareholder will automatically be deemed to have transferred their shares.

The types of issues commonly considered here include:

• whether the other shareholders should have the right of first refusal if another shareholder wishes to sell all or some of their shares
• whether shareholders should have the right to transfer shares to family members without triggering pre-emption rights
• what events will trigger a compulsory transfer of shares
• if the sale price payable for shares on the occurrence of any compulsory transfer events should be fair value or lower (often called “good leaver” and “bad leaver”) – or if a different price should be payable
• drag- and tag-along clauses

3. Manage disputes

Sometimes disputes arise between shareholders – particularly if they cannot agree on the direction of the company. It is therefore prudent to set out what happens in the event of deadlock at board- or shareholder-level.

Ultimately if the shareholders cannot agree on the direction of the company, then one party might want to compel the others to buy them out (or compel another shareholder to sell). It is useful to have a set process in the shareholders’ agreement for dealing with this, including setting out how the sale process is triggered, what the purchase will be, and any payment terms.

If you would like more information or discuss your requirements regarding shareholders’ agreements, contact Siobhan Williams on swilliams@darwingray.com or on 029 2082 9124.