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If you are setting up a limited company with others one of the many things you should consider is a Shareholder Agreement. This fact sheet looks at why you need such an agreement and what such an agreement should contain.


If you decide to enter into a business partnership with someone you would no doubt have a partnership agreement to set out who does what, who is entitled to what and so on. But similar rules apply if you are setting up business with someone as a limited company.


If you?re setting up a limited company with others you will no doubt all own shares in that company and so it?s best to have an agreement in place to avoid future misunderstandings and problems in running the business.


Shareholders agreements are private arrangements between the shareholders in a company. They deal with such things as:

  • What each shareholder brings to the business
  • How the business is run
  • What happens if one of the shareholders dies or leaves for any reason

Why have a formal agreement?

Shareholders agreements are used because even the smallest business has to operate under the same company rules as much larger ones.


In many instances a small limited company is often more like a partnership than a quoted company. Using a shareholders agreement allows the best of both worlds. The company can be run as if there were a partnership with the advantages of limited liability and any other reasons behind forming a company in this way in the first place.


What if we ?don?t? have a shareholders agreement?

In a partnership all the partners are entitled to a share of management and to know what is going on. In a company, whoever owns 51% of the shares effectively runs the business unless it can be proved they are seriously abusing their power. This means that if for example there are three equal shareholders any two can exclude the third from, say, being a director.


A partner can dissolve a partnership at any time and take out his share of the assets that have been built up. If a shareholder leaves he cannot force anyone to buy his shares. This means if he leaves, dies or is thrown out his capital may be very difficult to get out of the company and the other shareholders can continue using it as an interest free loan forever.


What is normally in the agreement?

  • Who is to work in the company and on what basis. All the shareholders will usually be entitled to be directors
  • A list of matters which cannot change unless all the shareholders agree
  • An agreement to insure shareholders lives so that if they die the others have a fund to buy their shares
  • How to retire in a way that gives the others a chance of buying the retiring shareholders shares

Drafting a Shareholders Agreement

Shareholders can create a shareholders agreement at any time. It?s best to make a note of all things the shareholders want to be covered and then take advice. Usually all that is needed is one or two meetings with the company?s solicitors to discuss what is needed. A document can then be drafted. It will usually only need minor adjustments before it is ready to be signed.


It?s best to get work done at an early stage as then the chances are relationships are such that an agreement is not too difficult. This is often not so when a dispute arises. Sensible mechanisms for resolving disputes can be included and often save huge amounts of time and legal costs later.


For advice about drafting a Shareholders Agreement or any commercial matter contact LawPlus Commercial today or view our Commercial Law Fixed Fee Service.


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