A Shareholders’ Agreement is a private agreement – generally drawn up by a lawyer – between some or all of the shareholders of a Company. It documents information about the relationship between the shareholders; what will happen in certain eventualities (e.g. retirement, death or divorce of a shareholder); about dividend policy; about things that shareholders are not allowed to do within or outside of the company etc. They can also offer more protection to minority shareholders than is given in the various Companies Acts.
It is important – particularly for non-family businesses – to set out what is agreed by the shareholders in a legally binding way. This is because each shareholder then has certainty regarding what they can and cannot do within the business and regarding their shareholding. As well as certainty, by documenting what is agreed by the shareholders, arguments are less likely to arise in the future because there won’t be the ambiguities that occur in verbal agreements. And memory loss – about what each shareholder agreed to – will not be an issue. So, even if a shareholder later regrets signing up to a clause, they will abide by the Agreement because they put their name to it.
It is best to prepare a Shareholders’ Agreement very early in the life of a Company business – and/or when a new shareholder comes on board. If the agreement is made when the company is stable and doing relatively well, then it means there can be certainty about what needs doing if and when problems arise. The alternative – i.e. not having a Shareholders Agreement – can mean deadlock and catastrophe for a company as disagreements between major shareholders can make it extremely difficult for a company to operate.
A Shareholders’ Agreement can incorporate – or be linked to – things like a cross-option agreement between the shareholders (which provides for a way in which the business can purchase shares from a deceased shareholder). And it generally works alongside the formal Memorandum and Articles of Association of a Company – filling in the gaps where Company Law isn’t specific about elements of the relationship between shareholders and what their responsibilities are.