Rachael Taylor, of Russell-Cooke Solicitors, tells us what a shareholder agreement is and why it would be beneficial to have one.

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What is it?

A shareholder’s agreement will govern your relationship as founders of the business as well as those who join the business as investors at a later stage.  You might hear different names for this type of agreement (joint venture agreement, investment agreement, shareholders’ agreement) but they all essentially mean an agreement setting out how you’ll work together, how key decisions about the business will be made, and what you can and can’t do with your shares.

What will be in it?

Each agreement will be bespoke to the particular company, but this type of agreement will likely cover:

  • how directors are appointed to the board;

  • what happens if a new shareholder wants to join;

  • how big decisions are made (such as changing the business of the company, or making big purchases);

  • what happens if a shareholder wants to sell up and move on;

  • how you can stop a departing shareholder from competing with your business; and

  • what happens if a shareholder doesn’t do what they’re supposed to.

Obviously, you’ll all need to be happy with an agreement before you sign it, and if new shareholders join later they can also sign up to an existing agreement (you shouldn’t have to keep redoing it, unless something really material changes).

Why should we have one?

With any luck, you’ll go to the trouble (and, unavoidably, some expense) of having a shareholders’ agreement prepared, only to leave it in the back of a drawer and never look at it again. Hopefully, the venture will have gone well and you’re getting along and concentrating on running a successful business.

The real value of a shareholders’ agreement can become clear when the picture isn’t so rosy and something has gone wrong, perhaps because the founders have fallen out, someone’s personal circumstances have changed, or the business just hasn’t been as successful as you’d hoped. When this happens, a good shareholders’ agreement will lay out the process for how to move on from this (such as the remaining founders buying out one who wants to leave). 

Even if you don’t end up in this ‘worst case scenario’, a shareholders’ agreement is still really useful as a planning exercise and for focusing minds at the outset about your expectations of each other.