Is it necessary for my new business to have a shareholder’s agreement?

If you're beginning a business with others, it's vital to plan ahead for major problems and lay down some ground rules for your individual duties and how the company will operate.

It's easy to think that nothing can go wrong when starting a business with family or friends. You could think that because you trust each other, you don't need to put in place anything like a shareholders' agreement - that asking for one will make you appear untrustworthy or disrespectful to your new business partners.

In this article, we'll talk about why it's important to have a shareholder agreement in place and how it may help your business in the long run.

What is a shareholder agreement?
A shareholders' agreement is a legal document that all of the company's shareholders have consented to. It governs how shareholders do business and can help safeguard a startup from unanticipated shareholder disputes that could jeopardise the company's growth and, as a result, its value. 

A shareholders' agreement differs from the articles of association of a company. The articles of organisation are a business's constitution, and they serve as the foundation for a statutory contract between the business and its shareholders. 

Because a shareholders' agreement is not required to be filed with Companies House, the terms of the agreement remain private. The articles of association of a company, on the other hand, must be filed with Companies House.

What key components should be included in a shareholder’s agreement?
A shareholders' agreement often describes each shareholder's rights, duties, liabilities, and obligations, as well as how the company should run. 

Your shareholders' agreement should cover topics like: 

  • Reserved Matters
Despite the fact that the directors are responsible for the day-to-day administration of a company's activities, the shareholders' agreement might provide shareholders with the authority to assent to certain choices that they believe should not be left to the directors' discretion.

  • What happens if a shareholder decides to quit, dies, or declares personal bankruptcy? 
A shareholders' agreement might include a provision that requires a shareholder to first offer their shares for sale to the remaining shareholders and/or the business before selling them to third parties.

  • Restrictions in shareholder agreements 
A shareholders' agreement might limit an outgoing shareholder's capacity to create a competitive firm, which is crucial for protecting your startup's interests and maintaining its worth. 

  • What happens if one of the company's shareholders wants to sell it? 
By inserting 'drag along' provisions in the shareholders' agreement, the majority shareholders can be protected. 

When a majority shareholder receives an offer to buy all of a company's shares, 'drag along' provisions allow the majority shareholders to compel the minority owners to accept the arrangement. This avoids a sale from being sabotaged by a thorny shareholder. 

Minority shareholders can be protected by incorporating 'tag along' provisions in a shareholders' agreement. 

If the majority shareholders have received an offer for their shares under these circumstances, the minority shareholders might compel the majority shareholders to extend the offer to the minority shareholders as well.

  • Impasse in decision-making 
Some disagreements will lead to a situation in which shareholders are unable to agree on the appropriate course of action. The business can become stuck in limbo if there isn't a majority to decide which way to go in. 

When a lot of shareholders possess the same percentage stake and become deadlocked, this is a typical occurrence. This scenario can be avoided with the use of a shareholders' agreement.

Is this document necessary for my business?
If your startup company has two or more owners, a formal shareholders' agreement should be considered. Agreeing on how you'll deal with core issues now might spare you a lot of potential issues later. 

The reason for this is because this particular agreement can control how future changes in the business are handled, such as how decisions are made, what happens if a shareholder wishes to quit or becomes unwell, and, most crucially, what happens if the shareholders disagree. 

Overall, we suggest that a shareholder’s agreement be created right away. This guarantees that your agreements with your shareholders are clear and concise, reducing the possibility of a disagreement. Because it's impossible to predict all of the challenges that may develop in the future, it's best if everyone involved agrees from the start. 

It will lessen the likelihood of dispute during the early phases of the company's formation and later on. In the end, it will ensure that the company works smoothly.  

Here at Persona Finance, we can assist you with this process and advise you on a number of terms to add to your shareholders' agreement. For more information on our range of services, please contact us at [].