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Seven reasons to have a shareholders’ agreement

Whilst shareholders’ agreements are not a legal requirement, they have become a key document of companies which have multiple shareholders, explains Lodders’ corporate and commercial specialist, Suman Dulku.

Shareholders’ agreements are agreements entered into between some or all shareholders of a company, with a view to regulate the relationship between them. Here, Suman outlines seven reasons to enter into a shareholder’s agreement.

  1. They are private documents

It is a requirement for a company’s articles of association to be available at Companies House, whereas shareholders’ agreements will not be visible to the public, allowing the terms of the agreement to remain confidential.

  1. The terms can be flexible

Shareholders’ agreements enjoy a degree of flexibility and can be tailored to the specific requirements of the company. The agreements can address a number of matters, from a variation of a dividend policy, to the procedure for a valuation and transfer of shares.

  1. They can offer protection to majority shareholders

Certain terms can be included to protect the interests of majority shareholders, such as “drag along” provisions. These apply where a majority shareholder has accepted an offer from a third party for the purchase of all of the shares in the company, and the provisions require minority shareholders to sell their shares subject to the same terms applicable to the majority shareholders.

  1. They can offer protection to minority shareholders

Conversely, “tag along” provisions can be included to protect minority shareholders enabling them to “tag on” to majority shareholders intending to sell only the majority shareholding to a third party.

In the recent case of Berlin Hyp AG v Lumineau and others, at an urgent hearing, the High Court granted an injunction to prevent a company (amongst other things) from issuing shares and loan notes in breach of a shareholders’ agreement. The agreement mandated that, in such circumstances, the approval of the company’s minority shareholders must first be obtained. In this case, the approval had not been obtained and the High Court was quick to uphold the protection of the minority shareholders.

  1. Contractual remedies

If a shareholders’ agreement is breached by one of the contracting parties, this will give the injured party/parties contractual remedies.

  1. A reference point if things go wrong

Often companies will be incorporated with friends and family taking shares in the company, without a view to protecting their interests. A shareholders’ agreement can offer this protection and detail the procedures which should be adopted to resolve a dispute between shareholders, particularly in the event that a deadlock occurs between two 50/50 shareholders.

  1. They demonstrate business stability

Having a shareholders’ agreement in place can show business stability, particularly to investors and lenders, and demonstrate that the company has planned for the long term, and will be able to deal with any disputes quickly.

Our Corporate & Commercial team is able to assist and advise you in respect of shareholders’ agreements and related matters. For more information, please contact us on 01789 293259, or via email.

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For more information, please contact us on 01789 293259, or via email.