What is a Shareholder Agreement and how can it benefit my Company?

A shareholder agreement is a legally binding contract entered into by all or some of the shareholders of a company. A shareholder agreement governs the relationship between the shareholders and the company to commit everyone to good governance and fair and proper running of the business.

Whilst the agreement is useful in dealing with disputes, it is valuable in making sure the business is and is seen to be running efficiently.

The agreement covers a variety of points, including but not limited to:

• the rights, duties, and responsibilities of shareholders to the company and to one another, and the company to shareholders;
• the transfer of shares;
• issuing new shares;
• decision making;
• how the company will be run;
• the dividend policy;
• how directors will be appointed; and
• the process if a shareholder wishes to leave.

A shareholder agreement is invaluable as it mitigates against any potential disputes from arising at a later date, by setting out clearly how certain situations will be handled at the outset, and by eliminating any potential conflicts between shareholders. A shareholder agreement can assist in times of uncertainty and can resolve any issues or misunderstandings between shareholders. A shareholder agreement essentially safeguards and protects shareholders.

A shareholder agreement is just as important for a family run business as it is for a business run by friends or acquaintances. Having a shareholder agreement in place for a family run business has many benefits, as the agreement can protect wealth and shares, particularly important where a shareholder is going through a divorce or a relationship breaks down. Shareholders can help to protect shares and ownership of the business by ensuring shares should only pass down to direct descendants. This essentially means no other individual should be able to own shares in the business unless they are the children or grandchildren of the originating owners.

It is important to protect your interest in the business by having a shareholder agreement in place as the articles of association may not offer full protection.

• By Nafissa Yousaf, Trainee Solicitor