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Why you need to know about shareholders’ agreements

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If you have a limited company – or you are thinking of starting one – then a shareholders’ agreement will be vitally important to you. It can also be essential when building a formal working relationship between company founders and future partners.

A shareholders’ agreement is a legally binding contract that defines the association between the company and a shareholder or multiple shareholders. In a nutshell, it minimises the potential for any future conflicts.

It achieves this by exploring the protections and privileges afforded to both the limited company and anyone who owns its shares. It would even define what is meant by a “shareholder” in the context of that particular business.

The agreement also sets out goals and expectations, from both your company’s point of view and in relation to the shareholders’ interests. Responsibilities are clarified, including the boundaries of share ownership and the voting rights that are provided.

Though this is a legal contract, it’s a confidential and private agreement between each company and its shareholders. There is no obligation to file it at companies house, for instance.

What other areas would a shareholders’ agreement cover?

Having this level of certainty between a company and its shareholders creates a smoother working relationship. This includes mapping out what sort of information shareholders have a right to receive, and at what point their contribution is needed to ratify actions. For example, it could list the sort of business changes and developments with must receive the backing of a majority vote from shareholders before they go ahead.

Other information contained within a shareholders’ agreement could include any restrictions placed on selling company shares. The contract could also include protocols for issuing new shares too.

Agreement is also reached on such matters as ownership of intellectual rights and what control shareholders have over nominations of company directors.

What happens when shareholders’ agreements are breached?

Being involved in the process of creating a shareholders’ agreement provides control over how the business relationship will be structured, and how roles and responsibilities are to be shared in different future scenarios.

If your company already has shareholder agreements in place, refreshing your understanding of the precepts can be vital. This is because inadvertently breaching the agreement could have serious consequences.

It is also important for shareholders to fully understand their rights, and any restrictions placed on them, within the contract. This avoids situations in which they commit actionable breaches.

Some of the ways shareholders can contravene an agreement include selling off a major company asset without proper permission or transferring shares outside their area of responsibility.

From a company point of view, shareholder agreements can be breached by making important decisions unilaterally, which should have been referred to a shareholder vote. Or, breaches can happen when dividend policies or confidentiality arrangements fall short of the shareholders’ expectations as laid out in the agreement.

The repercussions of breaching shareholder agreements

What sort of penalties can arise from a breach of a shareholders’ agreements?

The effects of contravening these contractual arrangements depend on the level and detail of the problem. Sometimes, less serious issues can be dealt with by discussion and agreement on steps to take to avoid future offences.

However, if either the company or the shareholders can show that the breach caused them to suffer a loss of some form (such as a fall in share values) there are several potential legal steps that can be taken. This includes, for example, a company suspending the voting rights of a shareholder who has contravened the agreement.

There can also be situations in which either the company or the shareholders seek to recover monetary damages.

In the worst case scenario, companies have been forced to take out legal injunctions against a shareholder who has completed a serious breach, which then requires them to make robust redress, such as transferring all their shares.

There are also damages you can apply for – due to a breach of shareholders’ agreements – under UK common law.

When first formulating a shareholders’ agreement it is wise to include protocols for resolving disputes, as a preemptive measure to ensure a mutually beneficial relationship.

 

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