Behind many successful businesses, there’s a crucial (and unglamorous) ingredient: an effective shareholders agreement.
At the end of last year, the number of companies in the UK reached a record high – with over 5 million registered. That included over 771,000 companies registered during 2021 itself.
It’s encouraging to see the UK showing its entrepreneurial spirit but we also saw a record number of company dissolutions – almost 607,000 of them. The wider economy played a part in this, of course, but another factor in corporate longevity and success can be the nuts and bolts of how the company is set up.
Shareholders agreements
In our view, a shareholders agreement is a key element here. As it’s not a legal requirement, people often neglect it, leaving the door wide open for future problems. Rather than relying only on standard articles of association, it’s worthwhile reading our guide below to shareholder agreements.
What are they?
A shareholder agreement can define shareholders rights and obligations, facilitate the smooth running of the business, and prevent conflict. Any private company with two or more shareholders can – or should – have one.
Why have one?
Because people fall out. Even if you start a business with family or friends, you may disagree over the direction or financing of the business, or your personal or family circumstances may change.
It’s a classic situation in business that two people (or groups) with equal shareholdings reach deadlock over a dispute, stalling or even destroying the business.
Who do they protect?
Both majority and minority shareholders.
In the case of minority shareholders, an agreement could provide them with greater rights than they get with standard articles.In the case of majority shareholders, the shareholders agreement could include, for example, ‘drag-along’ rights to prevent a minority shareholder blocking a company sale.
What else can they offer?
That depends on what you and your co-shareholders, and your advisers, want. The agreement could cover areas such as:
- How you run the business and make key decisions.
- Whether the shareholders get different share classes, rights and dividends.
- Dispute resolution.
- What happens if a shareholder wants to sell shares, leaves the company or dies.
- Non-compete provisions.
Some of these elements may be covered by the Companies Acts or other corporate law, but an agreement may make it easier to achieve them in practice. A corporate lawyer can help with this.
Nimarta Cheema, Associate, Corporate and Commercial
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