Should Every Business Have A Shareholder Agreement?

By Glossy Magazine

Should Every Business Have A Shareholder Agreement?

Should Every Business Have A Shareholder Agreement?

Should Every Business Have A Shareholder Agreement?
Jabbar Kharwar

Jabbar Khawar, Partner and head of Corporate Law at Blackstone Solicitors, discusses shareholder agreements and how his team can help you.

Disputes happen in life – between friends, family and most definitely in business. Growth, change of direction and financial worries can put a strain on any relationship and business relationships are no different. Putting a well drafted Shareholder Agreement in place can save your working relationships, as well as your bank balance. 

What is a Shareholder Agreement and why do I need one? 

A Shareholder Agreement is a contract between shareholders in a business, which regulates their rights and obligations and provides a sensible mechanism for making decisions within the company. 

A good Shareholder Agreement protects the business as well as your own investment, giving you peace of mind and the freedom to focus on the growth and success of your business. 

What are the risks of not having a Shareholder Agreement and what are the key provisions used to prevent them?

Not having a Shareholder Agreement can potentially create a serious risk of disputes between shareholders. A good Shareholder Agreement can pre-empt potential problems and sets out ways to deal with them. There is no agreement that’s a ‘one-size fits all’, so it’s important to get advice from a legal professional to tailor provisions to your company’s needs, however, there are a few popular provisions that are often incorporated within an agreement, such as:   

Good/Bad leaver provisions: 

A ‘Good’ leaver may be a shareholder retiring, and a ‘Bad’ leaver may be a share-holder breaching the terms of the agreement. Bad leavers can by their actions adversely affect the reputation and good will of the business. This can be reflected by a reduction in the share value of their shares whereas Good leavers typically receive market value for their shares.

Compulsory transfers: 

Provisions that set out certain events, such as retirement, death or bankruptcy, that trigger a share-holder to transfer their shares to a fellow shareholder, stopping shares ending up in the wrong hands.

Drag-along/Tag-along Rights: 

Drag-along rights allow a majority share- holder to force a minority shareholder to join in the sale of their shares, which creates a better deal for the buyer, whereas Tag-along rights offer minority shareholders the option to take part in a sale of shares by the majority shareholders, protecting the minority shareholders. 

Deadlock or Casting vote: 

These provisions set out what would happen in the event of irreconcilable conflict between the parties and allows a shareholder to have an extra vote if the vote is tied. 

Why instruct a solicitor to draft a Shareholder Agreement? 

It may also become necessary for your legal adviser to amend other related documents such as your Articles of Association once the Shareholder’s Agreement is drafted. It’s important that both agreements exist harmoniously together and do not conflict.

Businesses are unique. Just like no business is the same as another, no two Shareholder Agreements should be the same either. Your Shareholder Agreement should always be bespoke and tailored to encompass your own business and personal needs. 

If you are thinking of getting a Shareholder Agreement prepared for your business or need general corporate advice, please contact us on 0161 929 0121 for more information. 

For legal advice contact us on:  0161 929 0121 

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