If the company has more than one shareholder, it is important to enter into a Shareholders' Agreement (also called a Consortium Agreement or Joint Venture Agreement). A Shareholders' Agreement describes how the shareholders will own and operate the company and their rights and obligations towards each other. This reduces the risk of future conflicts, facilitates cooperation and increases the likelihood that the company will be successful.
Why is a Shareholders' Agreement important?
The agreement will set out how to handle future events, e.g. a sale of the company, or what happens to an owner's shares if they pass away. Unlike the Articles of Association, the Shareholders' Agreement does not need to be filed with the UK register of companies and is not a public document. The agreement can therefore include confidential provisions covering things such as the company's business plan or how profits will be shared. The terms of the Shareholders' Agreement can also be changed in the future, as long as all parties agree on the changes.
Important provisions in Shareholders' Agreements
- A shareholders' agreement can include governance provisions around how directors are appointed (for example, whether certain shareholders should be able to appoint a director) and what decisions cannot be taken without the approval of all of the shareholders.
- Make sure the shareholders' agreement sets out what happens when a shareholder wants to sell their shares in the company. Consider whether the shareholder should be free to sell their shares to anyone or whether the non-selling shareholders should have a right to purchase the shares before they are sold to a third party.
- If a shareholder is important to the business of the company, make sure the shareholders' agreement includes protections that will stop the shareholder from joining a competitor.
- A shareholders' agreement can include provisions around what happens when the company is sold. For example, should a purchaser be required to make an offer to all of the company's shareholders?
Common mistakes in Shareholders' Agreements
Many founders feel that it is unnecessary to have a Shareholders' Agreement when starting a company with a friend. You already know each other, so what can really go wrong? Well, as in all types of relationships, even a friendship can end due to unforeseen events. Maybe one of you wants to withdraw from the collaboration and instead start working for a competitor. Or maybe you want to cash in on your success and sell the company. Agreeing how you deal with these issues at the start of the venture will avoid a falling-out later on.
PocketLaw helps you build a better business
Downloading a template is easy. Knowing how a legal document creates value for your company is more difficult. That's why we created PocketLaw - to guide you in what legal you need, and to get it in place. In PocketLaw's platform, you can easily create a Shareholders' Agreement by answering simple questions and sending directly for e-signing. In addition, you can store your agreements in our clever document management system, and also get legal guidance as well as personal advice. Everything you need to grow your business and drive it forward.