When you go into business with someone else, whether that’s a friend, a family member or a business partner, it’s easy to think that trust is enough. You know each other. You’re on the same page. Why would you need a formal document?
The honest answer is that a shareholders agreement isn’t about distrust. It’s about making sure that if something unexpected happens, whether that’s a disagreement, a serious illness, a divorce or one of you wanting to leave, there’s a clear process to follow that protects everyone involved.
Nobody starts a business expecting things to go wrong. But having an agreement in place means that if they do, you’re dealing with a situation rather than a crisis.
So what actually is a shareholders agreement?
It’s a private, legally binding contract between the shareholders of a limited company. It sits alongside your articles of association and sets out how the company is owned and run, what happens in various scenarios, and how decisions get made.
Unlike your articles of association, which are filed publicly with Companies House, a shareholders agreement is private. Only the people who sign it need to see it.
What does it cover?
Every shareholders agreement is different because every business is different. But most will cover:
- Who owns what and what voting rights are attached to different shares.
- How key decisions get made, and what happens when shareholders disagree.
- What happens if someone wants to sell their shares, including whether existing shareholders get first refusal before shares can be sold to an outside party.
- What happens if a shareholder dies, becomes seriously ill, or goes through a divorce.
- Rules around setting up a competing business.
- How disputes get resolved without everything grinding to a halt.
That point about death or divorce is one people often don’t think about. Without an agreement in place, a deceased shareholder’s shares could pass to their spouse or family member, who then becomes a shareholder in your business whether you like it or not.
What happens if you don’t have one?
Without a shareholders agreement, the only document governing your shareholders’ rights is your articles of association. That leaves quite a few gaps.
Unfortunately, we’ve seen first hand what happens when things go wrong without one in place. A disagreement that could have been resolved quickly became a much bigger and more costly problem, simply because there was no agreed process to follow. It’s not something we’d want any business owner to go through.
More generally, the gaps it leaves include disagreements between shareholders becoming much harder to resolve, minority shareholders having very limited protection under company law alone, no clear process if a shareholder wants to leave, and the risk that if a majority shareholder sells their shares the business could end up partly owned by someone you’ve never met.
The disputes that tend to cause the most damage are rarely the ones anyone saw coming. A business partner’s marriage breaking down. A sudden illness. Someone deciding they want to go in a different direction. A shareholders agreement won’t stop those things happening, but it means you have a clear, agreed way to handle them.
Do you legally have to have a Shareholders Agreement?
No. A shareholders agreement is not a legal requirement. But where there is more than one shareholder, we would strongly recommend having one in place. The cost of getting one drawn up is small compared to the cost of resolving a dispute without one.
Who draws it up?
This is important. A shareholders agreement is a legal document and needs to be drafted by a solicitor, not an accountant. We want to be clear about that. If anyone tells you otherwise, that’s worth questioning.
What Fresh Clarity can help with is the financial and accounting side of setting up your company structure correctly from the start. That includes how shares are split between directors, how dividends work, what the tax implications are of different share structures, and making sure your numbers are set up in a way that reflects how you actually want to run the business.
Getting both sides right, the legal and the financial, means you’re starting on solid ground.
A quick note if you’re already in business without one
It’s not too late. A shareholders agreement can be put in place at any point, not just at the start. If you’ve been trading for a while and don’t have one, it’s worth having the conversation sooner rather than later.
Where to start
If you’re setting up a limited company with one or more other people and want to make sure the financial side is structured correctly, get in touch with us and we’ll help you get the foundations right.
For the shareholders agreement itself, we’d recommend speaking to a local solicitor who specialises in company law.