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5 reasons why you need a shareholder’s agreement

There is no legal requirement to have a shareholders’ agreement in place, although any company which has more than one shareholder is advised to have one. So, if it is not a requirement you might be thinking why should you invest your money in one? Danielle Austin, highlights five reasons why you should:

  1. Minority shareholder protection
    Without a shareholders’ agreement in place, a minority shareholder will have little to no control in how the company is managed as most decisions concerning the company only need a majority vote. However, a shareholders’ agreement can allow key decisions concerning the company to only take place with the unanimous consent of all of the shareholders.
  2. Privacy
    Although a shareholders’ agreement can work in conjunction with a company’s articles of association, it is not a public document unlike a company’s articles of association which are available to the public to view at Companies House. This allows for the content of a shareholders agreement to stay private and confidential between the parties.
  3. Shares linked to employment
    If an employee is also a shareholder and their employment ceases, there is no requirement for that employee to sell their shares meaning they will remain entitled to make decisions concerning the company and receive dividends. A shareholders’ agreement can include provisions forcing an employee to offer his shares up for sale if their employment ceases. A shareholders’ agreement can also include the price paid to the employee for his shares depending whether he is considered to be a ‘good leaver’ or a ‘bad leaver’.
  4. Disputes
    Disputes in companies do occur and if the shareholders fall out, a shareholders’ agreement can often be a cheaper way to resolve the dispute than litigation. A shareholders’ agreement can include provisions for dealing with disputes and how decisions should be made if the shareholders do not agree.
  5. ‘Drag and Tag’
    These provisions allow a minority shareholder to ‘tag along’ to a majority shareholder on the sale of their shares to a third party. They also allow a majority shareholder to ‘drag along’ a minority shareholder and force them to sell their shares to a third party. Whether the minority shareholder is ‘tagged’ or ‘dragged’ they must then sell their shares at the same price and on the same terms as the majority shareholder.

If you would like further advice from our Company Commercial team contact Danielle Austin on 01908 689399 or email daustin@geoffreyleaver.com.