A shareholders’ agreement is a contract entered into between a company and some or all of its shareholders. It works in conjunction with a company’s articles of association by creating internal procedures by which a company is governed but giving shareholders greater protection than can be provided for in the articles alone. The aim of the document is to reduce the potential for conflict by clarifying the responsibilities of the shareholders and providing certainty as to what can or cannot be done and ensuring that decisions are taken fairly.
There is no legal requirement to have a formal shareholders’ agreement, but every company with more than one shareholder is well advised to have one. Implementing a shareholders’ agreement at the outset will be quicker and easier than negotiating a dispute where no agreement is in place, to determine how such disputes will be resolved.
A shareholders’ agreement can detail any arrangement reached between the shareholders and it can vary what would otherwise be the legal position. It can also help provide certainty for the other shareholders and their families in situations where a shareholder’s personal circumstances change or in the event of the death of a shareholder.
It is an integral part of succession planning, both for the company and the shareholder personally, that the shareholder reviews their Will when entering into a shareholders’ agreement. When the shareholder is thinking about making a Will or updating an existing Will, they need to carefully consider what should happen to their shareholding in the event of death and how any existing shareholders’ agreement may impact on their estate (and vice versa).
Without a shareholders’ agreement, a deceased person’s shareholding will form part of their estate and pass on to beneficiaries either via their Will, or under the rules of intestacy if there is no Will. This may cause problems for the company and for the bereaved family if the holding passes to a non-shareholder. It can be further complicated if the shareholding passes into a Will trust.
With a shareholders’ agreement, there will be mechanisms in place for dealing with the shareholding, such as establishing rights of first refusal for the existing shareholders to purchase the holding. This would assist both the company by ensuring the holding remains among existing shareholders and the executors of the estate who will be compensated for the loss of the shareholding leaving the estate. It ensures smooth succession and that no one loses out.
The major benefit of a shareholders’ agreement is that it remains private between the parties to it, unlike a company’s articles of association which is a publicly available document at Companies House.