If your company has a relatively small number of shareholders, you already know that potential for disagreement and deadlock is great. Every company with more than one shareholder is advised to have a Shareholders’ Agreement, even if there is no legal requirement to sign one. This simple document which all shareholders should sign creates a contractual obligation between them and it’s good for the company in general. The company will be run smoothly and profitably, and the risk for potential conflict will be significantly reduced.
Unlike a company constitution which is required to be made public, a Shareholders’ Agreement is not viewable by public and does not have to be registered on the Companies Register. It is only seen between the shareholders in the company and it makes all the information concerning company’s shares private. Even if one of the shareholders signs a confidentiality agreement with a potential buyer, they will not be able to breach confidentiality of a Shareholders’ Agreement.
In case one shareholder’s personal circumstances drastically change, it will not have the influence onto the others. The company and all other other shareholders within the company are protected, as well as the each shareholder’s financial interest in the company. In case of the death of one of the shareholders, the interests of their families are protected as well.
One of the best thing about the agreement is that it can be tailored so that it suits the company’s needs perfectly. Any Shareholders' Agreement template can be changed and tailored so that it covers duties and obligations of each shareholder. You can easily make it as simple or as detailed as you and the rest of the shareholders want without changing its function. Some points which should be included in any agreement are: how the company is structured and divided among shareholders, what are their obligations and commitments, how a share value is determined, etc.
In case a majority of shareholders agrees on something and the minority doesn’t, an agreement protects the rights of minority as well as the investment value of their shareholding. In case there isn’t an agreement, majority shareholders might be able to force issues which are inconvenient for the minority or which are not in the minority shareholders’ interests. Once it’s set, only with the agreement of all the shareholders can the agreement be amended. On the other hand, it takes a 75% majority to change the company’s articles of association – which means that with a Shareholders’ Agreement, minority shareholders are much better protected.
It is the board of directors that determine the management of the company, unless agreed to the contrary by the Shareholders’ Agreement. Still, it is shareholders who by written resolutions or in general meetings make key decisions in any way related to ownership. Thus, an agreement is important for several reasons: it fully determines the basis on which important decisions will be made, it restricts the power of the directors, and provides protection for all the parties involved in the ownership.
By signing a Shareholders’ Agreement, each and every shareholder ensures that their responsibilities are well defined and that running of the company is well thought through. With clear knowledge of what can or cannot be done concerning the company, every decision will be made by discussion and consensus. It seems like an unnecessary move for a small company, or like too much work for a big company, but in the end it pays off.