What is a shareholders agreement?

When setting up a company with family or friends, it is easy to assume that in the future nothing can go wrong. We hope that in the future nothing can go wrong. However, family members and friends fall out, and if the worst should happen, you may end up with nothing.

Therefore, you should focus on the business of the company in order to protect your own investment and consider the introduction of a shareholders agreement.

As you might expect from an agreement between the shareholders of the company, it`s important to establish a reasonable relationship between the shareholders for its purpose, to help protect the investments of the company’s shareholders.

The agreement will be:

• Sort out the rights and duties of shareholders.
• Control the company’s shares.
• Describe how the company operates.
• Protect minority shareholders of the Company.

Without the agreement, minority shareholders (less than 50% of shares) will not have much control or say on how the company is run. There are laws that provide limited protection of minority shareholders, but it can be expensive to implement and would not achieve the desired compensation.

A majority shareholder who wants to sell their shares may come up against a minority shareholder who doesn`t agree. Therefore, the majority shareholder can force minority shareholders to sell their shares, known as a ‘drag along`. This is an important arrangement, but of course, the sales price and other fees for all shareholders, including minority shareholders, have to be fair.

It is always a good idea to put together a shareholder agreement as early as possible, usually close to the formation of the company to avoid confusion. For everyone on board to have a shared understanding can really make all the difference further down the line.

Your Virtual Office London are experienced company formation agents. We have been forming companies for over 40 years and have a vast amount of industry experience when it comes to the more intricate parts of limited companies and the best way to run them. A shareholders agreement is a very important document and we are able to help assist in the formation of a company and the creation of such mentioned agreements.