Neil Kelly, partner at MSB Solicitors discusses the importance of shareholders agreements for different types of business.
I am often asked the question whether every company should have a shareholders agreement. Whilst it is not necessary in every case, in most cases it is advisable.

A minority shareholder, for example, usually relates to an agreement where an individual invests financially, but is not in any way involved in the management of the business nor are they an appointed director. It is generally understood that minority shareholders’ rights are limited, therefore advisable that an agreement is reached early on to include rights to information, which might not ordinarily be available to them. Right of veto over key decisions should also be considered and minority shareholders should specify the transfer rights in respect of his shares; the rights he has as to dividend and how he would be remunerated.

A majority shareholder, by virtue of his shareholding, will be in a unique position of having power in the company and will usually have the ability to appoint and remove directors. A majority shareholder is unlikely to ever want to reduce this influence, however he may want to ensure that he has the support of minority shareholders in key decisions or ultimately, the sale of the company. In this case, a drag along clause should be considered so that the majority shareholder can force an unwilling minority shareholder to participate in the sale, provided shares are transferred on the same terms as the majority.

The majority shareholder may also want to have different dividend rights attached to the minority shares so that he can control how he pays himself without having to necessarily always pay dividends to the minority shareholders.

It is generally presumed that equal shareholders will have relatively similar needs and aspirations, though it is still advisable to enter into a shareholders agreement. This enables shareholders to agree a list of key decisions early on that need to be taken either unanimously or by a specified majority. In addition it will be important for the shareholders to decide what happens on the death of a shareholder; how shares will be transferred, succession issues and a dispute resolution procedure.

In my experience, perhaps where shareholders agreements are most advised, are in the cases of partnerships or family businesses. All of the issues raised above will be relevant to those types of business; transfer of shares, succession issues, decision making and management controls can all be sticking points.

In addition, 50/50 company disputes can often result in deadlock. For businesses that are 50% owned and managed, a useful provision is to include a dispute resolution clause, which could potentially unwind deadlock or determine the outcome if this occurs.
In this scenario, a shareholders agreement should not be seen as a complete solution; even if there is a well drafted shareholders agreement there is nothing to stop the parties litigating. The dispute resolution clause can include steps that have to be complied with before litigation is an option, such as mediation and/or arbitration.

Finally, a family company is likely to involve a range of shareholders in various guises and given the relationships between those shareholders, things can become incredibly clouded. Agreeing a shareholders agreement therefore, can provide much needed clarity and transparency for many matters that are likely to give to rise to uncertainty or tension. Whilst shareholders agreements for family businesses can often be challenging, it is important there is a document that at least attempts to set out the family’s wishes, exit strategies and importantly, succession planning. Dispute resolution provisions are also very important when dealing with family companies.

Of course, every company is different and will have its own dynamics but across the board, it is fundamentally important that shareholders agreements are tailored specifically to protect the interests of each of the shareholders.

There is no ‘one size fits all’ and it is important that this is understood, particularly in this age of the internet where template documents are so readily available, but to do this carries a great deal of risk.

A sound shareholders agreement is well worth investing in and it is advised that you take time getting it right. Whilst shareholders (and in particular minority shareholders) do have statutory rights not to suffer prejudice by actions of the majority shareholders, these type of actions are very costly and time consuming. Disputes arising out of shareholders agreements are likely to be easier to resolve and even in the instance that they do end up in court action, are likely to be less expensive to litigate.

Though this article only touches the surface in terms of the different considerations, we hope that it has highlighted how important it is to put a shareholders agreement in place for your business.