Edward Chapman Managing Associate
Five reasons why your company should have a shareholders' agreement
Edward Chapman, Corporate Managing Associate at Ince Metcalfes, explains why this document could be the best investment you make in your business.
Articles of association
Every company must have their own articles of association; a document which outlines the governing rules for how their company operates. These are publically available documents and can be found on the Companies House website. Fortunately, a set of template articles (known as model articles) are available for business owners, which are sufficient enough to get a company up and running.
However as a company grows, and particularly if you have a number of different shareholders or are taking on external investment, it is advisable to consider amending the articles so they reflect your circumstances and future plans. The kind of things that should be covered are the day-to-day operation of the company (director decision-making) and what happens when a shareholder wishes to transfer their shares.
Alongside the articles of association you can also have a shareholders’ agreement, which is a private document to govern the relationship between the shareholders. This is intended to be read together with the articles and should be worded so the documents do not conflict with each other.
There is no requirement to have a shareholders’ agreement, so why should you put one in place?
1. It is a private, secure document
As a shareholders’ agreement generally does not need to be filed at Companies House, you can include things which you may rather keep private, such as dividend policies and restrictive covenants (to protect the company from exiting shareholders competing with the business after they leave).
2. It provides a solution for any future conflict
You can also set out what happens in the event that shareholders disagree on decisions, which is particularly relevant in a 50/50 company with two shareholders. Any disagreement leads to deadlock and this can be difficult to manage. If this cannot be resolved between the shareholders then a variety of different mechanisms can be put in place to resolve matters.
3. It can set out dividend policies
In the event you have a number of shareholders with different classes of shares it may be helpful to include a dividend policy, which ensures clarity on how profits are to be split. The default position if you only have one class of shares is for dividends to be split pro-rata based on shareholdings. Where this may not be appropriate, you can tailor your approach to ensure shareholders are rewarded based on their involvement and contribution to the company.
4. It offers protection for minority shareholders
It is common to include protections for minority shareholders in a shareholders’ agreement; in order to reserve certain decisions which can only be made with unanimous consent. This is particularly important where your company has investors who want to retain an element of control when it comes to overall strategy, and such investors will usually insist on these protections as a condition of their investment. The type of things that these protections (sometimes called negative pledges) cover include the ability to borrow money, to employee new staff or issue new shares to name a few.
5. Restrictions for exiting shareholders can be put in place
After starting a business, it is important that you protect your company from any preventable harm. For example, you may wish to put restrictions in place to stop shareholders from competing with your company when they leave. When these restrictions are included in the company’s articles of association, they can be much stronger than if they were included in a contract of employment. Putting these restrictions in place can be very valuable for exit planning to help to protect the value of your company.
Whatever you hope to achieve with your company, taking action and putting procedures in place now can ensure your company is best placed to emerge from the current circumstances - whether your plans are to ultimately sell the business, or to pass it on to the next generation or your business partners.
Our Corporate team at Ince Metcalfes is experienced in putting in place bespoke articles of association and shareholders’ agreements, tailored to your company and your future plans. We take time to understand what your company does and where your priorities lie, offering a personable and pragmatic approach with the aim of becoming a trusted partner to your business.
For more information and advice, contact a member of our Corporate and Commercial team.