Though there is no legal requirement to have a formal shareholders agreement, it is recommended especially for private businesses, as shareholders are unable to simply sell their shares on an open market.
In short, a shareholders agreement can ensure that the mechanisms of running of the company and shareholder responsibilities are properly considered and clear at the outset. In turn, this reduces the risk of disagreement in future. It is a private document.
So what does it achieve?
- Greater protection to shareholders as there is more detail on protective provisions and limits on shareholders responsibilities, compared to what is usually set out in Articles of Association
- If they wish, private shareholders can vary what would otherwise be the legal position if there is no shareholders agreement in place
- The agreement can set out the basis for decision-making by shareholders over key decisions. This can happen in general meetings or by written resolutions.
- It is private and confidential and so the agreement is not available to view at Companies House (by creditors, employees and/or customers)
- It provides transparency over how decisions are made and a clear guidance framework for resolving disputes
- By having a shareholders agreement in place, it may help raise finance as it demonstrates the stability of the business to other potential partners
- The agreement safeguards each shareholder’s financial interest and the interest of the shareholders’ families in the event of the death of a shareholder
- It also protects minority shareholders’ interests (if applicable) as all shareholders must agree to any changes in a Shareholders’ Agreement (whereas the Articles of Association of a company can be changed on a majority vote)