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Do You Need A Shareholder Agreement For A Start Up?

November 26, 2020 Civil Litigation

This is a question many ask themselves when setting up a new company, thinking, mistakenly, that they can simply rely on the articles of association of the company. However, entering into a shareholders’ agreement should also be at the forefront of your mind when starting a new company.

The majority of disagreements between shareholders of a company could of been avoided had they decided to enter into an agreement from the outset. It is often the case that companies are set up between friends and family members, in which case people do not consider that they require to protect their interests until it is too late (i.e. a dispute arises). In smaller companies, it tends to be the case that the shareholders in the company are also the directors of the company. It is in these circumstances that a shareholders’ agreement is very useful, because all shareholders in the company can be reassured that their rights are protected. By having a shareholders’ agreement in place, you are ensuring all shareholders in the company have a say in the decisions, which affect the company. It is therefore best practice to put a shareholders’ agreement in place at the time the company is formed.

A shareholders’ agreement is an agreement entered into by the shareholders of a company. It can act as a safeguard for shareholders, providing for what is to happen if things go wrong and if a dispute arises. The agreements are governed by the law of contract and thus breaches of the agreement will provide a contractual remedy.

Should a dispute arise between shareholders’ of a company and there is no shareholder agreement to refer to, the disagreement will fall to be resolved by the articles of association of a company (a constitutional document of a company, which sets out how the company is run). This can become quite complex if there is no clear exit strategy for shareholders.

The agreement can regulate, for example, the ownership of the shares of the company, define the object and scope of the company, the management of the company, and the relationship between the shareholders. Importantly, the shareholders’ agreement will govern how the company is run and will set out the rights and obligations of the shareholders. Similarly, it can dictate how shares are valued, and how they can be transferred.

Each shareholders’ agreement will contain varying provisions, however, typical clauses include the required approval of all shareholders before entering into contracts or raising court proceedings; a clause which deals with what is to happen should a shareholder wish to leave the company; and dispute resolution procedures.  The Shareholders’ agreement will confer rights on the shareholders which would not be enforceable if found in the Articles of Association.

Some of the advantages of having a shareholders’ agreement are:

are not a “one size fit all” and there is not simply one style to follow. Shareholders agreements are tailored to each specific company, their future, their goals and their management structure. Thus, gaining appropriate legal advice is recommended to ensure the success of your company and to avoid creating more problems than the agreement may actually solve.

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