The Benefits of a Shareholder Agreement
Can you answer the following questions?
a. Do you know what your internal company rules are in relation to a share sale?
b. Do you have a mechanism to value your shares?
c. In what circumstance can you force a shareholder to sell?
d. Do you know what happens to shares if a shareholder dies?
If the answer is no, you should read on.
Some companies may have detailed articles of association setting out processes relating to the transfer of shares. However, many companies are likely to have simply adopted standard sets of articles of association when they were created and these do not look at these issues in any great detail.
Companies which have more than one shareholder would therefore be advised to put in place a shareholder’s agreement to provide the members, directors and the company a clear guidance as to what will happen in certain circumstances. The benefits of such an agreement include:
- The ability to reduce the amount of potential conflict between shareholders. Disputes are hugely distracting, and ultimately can affect the company and its viability. The agreement will provide a clear mechanism for the resolution of the disputes either through the transfer of shares or dispute resolution provisions for example in the event of a deadlock. This in turn assists with helping the company to be run smoothly and profitably;
- It provides greater protection to shareholders over and above the standard articles of association both in terms of how the company is run, decision making, minority shareholder and majority shareholder rights;
- The content of the agreement is private between the parties i.e. it is not placed on a public register such as Companies House unlike the articles of association;
- The shareholder’s agreement can also detail any protections for minority shareholders and indeed provisions to aid majority shareholders in particular if an offer for the company is made. It will also provide certainty when certain events such as death of a shareholder occur in terms of process to be followed, what happens to those shares and valuation of those shares;
- Finally, it can help attract investment into the business. Investors will be encouraged by the clarity that such agreements can provide.
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