20 December 2016

There is no legal requirement for shareholders in a private limited company to have a Shareholders' Agreement. Shareholders in SMEs may therefore be inclined to save themselves the costs of putting such an Agreement in place. A Shareholders' Agreement can, however, be useful in anticipating challenging situations which shareholders may encounter and setting out how those situations are to be dealt with.

Some of the advantages of having a Shareholders' Agreement are as follows:

1. Regulating the management of the company

Management of the company is typically left to the directors. There may, however, be certain key decisions that the shareholders do not wish to leave to the discretion of the directors, particularly if there are shareholders who are not also directors. These key decisions can be identified in a Shareholders' Agreement and reserved for determination by the shareholders.

2. Controlling the issue and transfer of shares

By including pre-emption provisions in a Shareholders' Agreement, shareholders have a means of avoiding dilution on the issue of new shares and preventing the introduction of external third party shareholders into the company on a proposed transfer of shares.

3. Minimising the potential for disputes

It is difficult for parties in business together to envisage falling out, but it happens. A Shareholders' Agreement can provide a framework for resolving disputes, so that they do not result in the company grinding to a halt.

4. Providing certainty around consequences of certain scenarios

Uncertainty around the impact on the company of changes in a shareholder's personal circumstances can be minimised by specifying in a Shareholders' Agreement what is to happen in the event of any such changes arising, e.g. if an employee shareholder ceases to be an employee, then the Shareholders' Agreement can provide that he must transfer his shares.

5. Providing protection for shareholders

A Shareholders' Agreement can provide protection for minority shareholders. It can require certain key decisions to be approved by a specified shareholder majority set at a threshold which requires consent from minority shareholders. "Tag along" provisions can also be included to allow minority shareholders to join in on a sale by the majority shareholders, so that they are not left behind. Protections can also be built into a Shareholders' Agreement for majority shareholders, e.g. "drag along" rights allowing majority shareholders to force minority shareholders to sell to a third party buyer.

6. Imposing post-exit restrictions

The risk of a departing shareholder competing with the company or soliciting its clients and customers can be mitigated by the inclusion of non-compete and non-solicitation covenants in a Shareholders' Agreement. These would apply to shareholders for so long as they hold shares in the company and for a period after they cease to hold those shares.

9. Demonstrating stability

Shareholders who have spent the time to put a Shareholders' Agreement in place can use this to demonstrate to banks and creditors that they are well-organised and that their company is stable and subject to good corporate governance. This can be helpful in encouraging those banks and creditors to deal with the company.

These are just some of the reasons why a well-developed Shareholders' Agreement can be of advantage to a company and a worthwhile investment in the long run. If nothing else, it will allow those running the business to do so in the knowledge that there is a framework in place to deal with the more challenging scenarios that can arise in the course of a company's lifetime.

Contact: Emma Barclay, Partner, eba@bto.co.uk  T: 0141 221 8012