Why you should have a Shareholder’s Agreement

Although there is no legal requirement to have a shareholder agreement, every company with multiple shareholders is well advised to consider having one.

Alongside a company’s articles of association, a shareholder agreement sets out the rules by which a company’s shareholders agree to operate their business and provides the basis of a legal framework between them.

Through a shareholder agreement, a company and its shareholders can determine the procedure for taking important management decisions and safeguard the financial interests of each shareholder and their family.

A shareholder agreement can also help to limit the possible harm that may be caused to a company’s business, particularly if things turn sour. In potentially trying circumstances, for example, a shareholder agreement may provide the framework through which certain difficulties can be resolved, either by providing a mechanism for the resolution of disputes or an exit strategy for disaffected or problematic shareholders.

Some of the issues that are typically dealt with in a shareholder agreement include:

• anti-dilution provisions, which can be designed to protect the original shareholders, particularly given that on any issue of new shares by the company there would otherwise be the risk that the original shareholders proportionate shareholdings – and their interests in the company – may be diluted;
• dividends and how they are to be declared and paid;
• share transfer provisions, including pre-emption rights (which essentially amount to a right of first refusal on the part of the company’s existing shareholders) and permitted – or compulsory – transfer provisions;
• reserved matters, which are often used to give shareholders (or a certain proportion of them) a veto on key strategic issues relating to the company structure and business;
• non-compete obligations, such as a restrictive covenant preventing shareholders from competing with the business of the company both whilst they are a shareholder and for a period of time afterwards; and
• certain other rules relating to the operation of the company and its business, including the availability of more detailed financial information or the identity of the company’s bankers, for example.

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