Do you need a shareholders agreement? Perhaps you are starting a business with somebody else and want to ensure ownership is divided fairly from the start. Or maybe you have a young business and you recognise the importance of putting the right contracts in place. Maybe you are acquiring investors or looking to reward your employees with shares and need a document to dictate terms. Shareholder agreements may also be drafted when the future of the company is uncertain, to simplify exit procedures should the business be sold, go public or be closed.
In this article, we will take you through what a shareholders agreement is, why you might need a shareholders agreement, how much it might cost, and whether you can use a shareholders agreement template or whether you need a lawyer to write a shareholders agreement.
What is A Shareholders Agreement?
A shareholders agreement is a legal contract between shareholders in any business, large or small, regarding who owns what in the company. Shares exist both within private and public companies and, most often, the founder(s) will own all initial shares. As a company grows it is common to break the company into shares so that others can benefit from its success. Share ownership can attract investors and partners and be used as employee incentives.
Division of sales may influence how a company is run, how profits (known as dividends when paid to shareholders), are divided among shareholders and how company assets are divided up if the business is ever sold or wound up.
For some businesses, the division of shares is a straightforward process. For example, split evenly between two founding partners. For other businesses, multiple parties might own shares and may even own different types of shares – read more about Different Types Of Shareholders. Whether your shareholders’ agreement would be simple or complex does not impact the importance of having one.
Why Do I Need A Shareholders Agreement?
There are a great many reasons for needing a shareholders agreement. If you are not the sole owner of the company then it is a contract you should acquire, even if you are in a business partnership with friends or family. Although creating official agreements can seem like a cynical act, in reality, they serve to protect and simplify relationships by keeping business and personal separate. Making decisions now about how a company is divided and what might happen in certain circumstances, means you can get on with growing your business and enjoying your venture knowing that you have formal procedures in place should complications arise.
A shareholders’ agreement does not only protect you against negative impacts but also ensures you are rewarded when you deserve to be. For example, if your hard work pays off and your shares increase in value. So creating a shareholders agreement can be a very positive experience that focuses as much on the potential of your company as what might go wrong.
Advantages Of A Shareholders Agreement
Firstly, it’s important to clarify that a shareholders’ agreement can be kept confidential. Being that some shareholders’ agreements may contain private information, this is highly important.
A shareholders agreement does not take into account how much a person loves a company. It does not care if they have worked there 2 years or 20 years. A shareholders agreement doesn’t care if a person went well above their role and responsibilities. A shareholders agreement only cares about the facts and the stipulations lined out in the contract.
Although a business should be driven by passion, decisions must be made with clear minds. That being, a contract that makes the objective decisions and governs the rules, can be a huge relief in charged circumstances. When difficult decisions have to be made, having contracts such as the shareholders’ agreement already in place, takes some of the burden of responsibility off of the Directors’ shoulders.
Protects Minority Shareholders
Since everyone in the shareholders’ agreement is obligated to follow the same rules, the contract evens the playing field. This means that, although stakeholders with more shares will potentially get more voting power, minority shareholders are protected in other ways. For instance, most agreements require that all shareholders must be in agreement if further shares are to be released. It should also include stipulations over transfers of shares and first refusals so that the integrity of the agreement cannot be manipulated by any one person.
Although a shareholders agreement might be assumed to favour business founders, as a business grows this can stop being the case. This is the subject of many films and documentary dramas. Many of which are based on real life. The story of company founders getting pushed out of their own business may have received the ‘Hollywood treatment’ but the reality is that this can happen when a company reaches success. As investors are acquired and partnerships formed, company founders may dilute their shares so much so that it becomes possible for them to be voted out of their own business. Drawing up, and keeping updated, a proper shareholders agreement can help to protect owners and founders from losing both financial and voting stakes in their company.
Rights, Roles and Obligations
A shareholders agreement should stipulate the roles and responsibilities of the parties involved. Director positions may not be described in detail but core obligations will be laid out. This serves as a reminder of what is expected of the shareholder and ensures their share rights are dependent upon their continued commitment to fulfilling their part of the agreement.
Whether a company is dissolved as insolvent or solvent, a shareholders agreement will make the process far easier. This applies whether you are a two-person business with no employees or a huge corporation with multiple responsibilities. If a company closes and there are still company assets or capital left in the business after creditors have been paid, these will be split between the shareholders as per the shareholders’ agreement.
Similarly, if a company is sold then the distribution of profits will be paid according to the shareholders’ agreement.
A shareholders agreement can protect against unforeseen circumstances, such as the incapacitation or death of a director. In these circumstances, a shareholders agreement does not only dictate not to do next but it takes the burden of decision-making away from other parties. Unforeseen circumstances are difficult for company owners to consider which is why many appoint a lawyer to write a shareholders agreement that covers all sorts of potential future scenarios.
Inclusion Of Other Clauses
Many companies include other stipulations and obligations in their shareholders’ agreements. This can work particularly well because directors may not have signed the same employee contracts as others in the business. This may mean they have not agreed to keep trade secrets or agreed to non-compete clauses. Such clauses may be included in a shareholders agreement so that if these rules are not adhered to, a shareholder’s rights may be void.
Arguably, these clauses are essential in shareholder agreements as shareholders may be privy to highly sensitive information.
How Much Does It Cost To Write A Shareholders Agreement?
The cost to write a shareholders agreement can vary greatly depending on how bespoke the agreement needs to be and how many parties are involved. For small companies who need a reasonably straightforward contract, the cost of a shareholders agreement can begin at £400. For more complex shareholders agreements the cost can rise to between £2,000 and £4,000.
Can I Use A Shareholders Agreement Template?
It is possible to use a template found online to write a shareholders agreement and this will undoubtedly save you money in the short term. However, there are several things worth considering:
How valuable is your shareholders’ agreement?
No one knows what will happen to a company in the future. You may make a modest living from your business or you might be launching the next major global enterprise. Either way, protecting your assets and your influence in the company will be high on your agenda. A properly drafted and signed shareholders agreement can do this.
A shareholders agreement with mistakes, oversights or unfair expectations is likely to be deemed unenforceable. This, of course, is unlikely to be known to the business owners, until the terms of the shareholders’ agreement need to be enforced. So, whilst the cost of a shareholders agreement will undoubtedly be an important factor in deciding whether yours is drafted by a professional lawyer, or by using an online template, it’s important to consider the value of properly protecting your business assets and your decision-making rights, now and in the future.
Can you be objective?
When entering into a partnership we should do so with optimism and good intentions. However, we need to also protect ourselves. Sometimes doing both yourself is not practical. Utilising the services of a legal professional, experienced in considering a whole range of circumstances, means an objective contract is more likely to be drafted. One which does not sidestep certain scenarios because the partners do not wish to offend one another or create the perception of mistrust.
Can the agreement be trusted?
With a shareholders agreement drafted by an owner, or an employee reporting to an owner, there is always going to be a concern that the contract may be skewed in the favour of one person. This may make investors, employees, or other directors, reluctant to sign the agreement or even consider purchasing shares at all. As a company grows, your business may suffer if contracts are not properly and professionally drafted.
Many business owners choose to draft their own shareholders’ agreements due to concern that legal costs may run out of control, especially if they are being billed by the hour. That’s why at LegalDrop we do things differently, business owners will be presented with the fees for drafting a shareholders agreement upfront from a variety of legal professionals so they know what their invoice will be before selecting a lawyer to work with. Let’s help find you the perfect lawyer for your shareholders’ agreement.