Why would I need a Shareholders’ agreement to block shareholder decisions?

by Elemental CoSec on October 1, 2012

Shareholders have a very important role in company decision making in terms of making changes to the company’s share capital or to its articles. However, it is only the majority whose vote will succeed. As such, shareholders may want to vary the usual rules of company law.

The first instance is shareholders with a minority stake. Often a company has already been formed and an outside investor comes in to provide a capital boost to further the growth of a company. In return, the investor would wish to take a minority shareholding in the company. On this basis it is usual for the outside investor to wish to receive a shareholders’ agreement; varying his share rights so that he has a greater say in the decision making.

Another class of shareholders who would wish to form a shareholders’ agreement are those under a Quasi-partnership. In this situation a company is set up on the understanding that it is equal like a partnership, however the shareholdings do not reflect this. Therefore, shareholders’ agreements can be used to create equality based on the fact that despite the shareholdings being different, both individuals have the same say in how the company is run. It is often the problem with this sort of arrangement that a shareholder’s agreement is not formed. This is usually because the company was formed on the basis of a close personal relationship. In this situation it is often very difficult to guess that your relationship may break down in the future or difficult to raise the issue of a relationship break down at a very exciting time at the start of the business.

It is on this basis that it is recommended to enter into a shareholders’ agreement when you have an idea of the certain issues you may face in the future. People often view the negative aspect of time and money in relation to shareholders’ agreements and therefore decide not to pursue. However, if in the future the problem arises which you had envisaged from the start, the complications and potential relationship breakdowns can make the negotiations much longer and fraught with complications.

An interesting aspect to shareholders’ agreements is it is possible to foresee issues and write into the agreement forms of dispute resolution. It is most beneficial to resolve future issues with clear cut agreements for that situation. If it is a more complex issue, appointing a third party arbitrator to determine a fair and reasonable agreement when the issue arises may be the easiest way to keep the relationship amicable at the business outset without losing the opportunity altogether. This third party arbitrator could order one party to buy out the aggrieved party at a price agreed, either break up or fair value.

The length of time and costs related to setting up a shareholder agreement can vary due to the complexities of your business. It is always important to seek advice on these matters. Elemental Cosec is a leading Company Secretarial Services expert in the UK who is able to advise you on your shareholders agreement.

This article is provided for information purposes only and is of a general nature. Specific advice should always be obtained if you are in any doubt as to your legal responsibilities and no liability is accepted with respect to this article.

Elemental CoSec
Elemental CoSec is one of the top company secretarial firms in the UK, providing company secretarial services, administrative services and corporate services to a range of companies from small start-ups through to listed PLCs.
Elemental CoSec

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  • Matthew Howat

    An excellent article. The virtues of the Shareholder’s Agreement are so wide-ranging yet so underused. I cannot remrecommend them enough to clients.

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