Shareholder agreement

When you set up in business with other people it is vital to have a shareholders agreement.

A shareholders agreement is a binding agreement between the shareholders of the company and is essential to protect each of the shareholders in the event of a disagreement. The agreement should cover topics, such as:

Matters requiring consent of the shareholders and the extent to which consent is needed. For example, what percentage of the shareholders is deemed to be consent, which could mean more than 50%, 75% or perhaps on some matters 100% agreement.

How to value the business in the event of a buy out or death of a shareholder. This is essential to protect shareholders, should any one of them want to be bought out of the company or in the event that one dies. By agreeing a method upfront there can be no arguments at a later.

Termination of the agreement and Notices – The agreement should include clauses to cover for certain events, such as; The winding up of the company; Shares becoming listed on a public exchange In the event of a sale of the business. The agreement should also include details of how notices should be sent to the shareholders and in what time frame and the acceptable method.

Transfer of shares and issues of new share capital – Although the Memorandum & Articles of Association usually deals with share capital to a certain extent in the UK, the agreement should deal with the matter of share transfer too. This is to prevent shareholders transferring their shares to a family member or friend without prior consent. Also, the agreement should deal with the eventuality of issuing new shares and how these should be split and paid for.

– Business of the company and non-compete clause – The shareholders should normally accept to be bound by a non-competetion clause in the contract, whereby they are not permitted to set up or buy another company which is direct competition. The agreement should therefore define the business of the company or what industry the business operates within. The shareholders would therefore not be able to compete within this definition outside of the company. By having a wider definition like this, it will prevent shareholders setting up similar or complementary type businesses themselves, and instead these can only be operated by the company in question.

Events of default – You need a clause that deals with events whereby notice is deemed to take place. Examples of this type of event are the bankruptcy of one of the shareholders or where a shareholder commits a serious break of the contract.

You can probably get draft contracts on the Internet or get one from the law society. However, you may fel it necessary to use the services of a solicitor to draft your contract and most firms will have a standard agreement to be taylored to your needs.

Shareholder agreement

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