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Shareholders’ Agreement? What Shareholders’ Agreement?

It is not uncommon for newly incorporated companies to have no idea what a Shareholders’ Agreement is, let alone put one in place. 

A Shareholders’ Agreement is a document which governs the relationship between the various shareholders and between each shareholder and the company.  Although there is no legal obligation to have one, it is recommended that all companies with two or more shareholders do.  These Agreements set out the rights, responsibilities and obligations of the shareholders to each other, directors of the company and the company itself. 

It is appreciated that dealing with admin matters, such as a Shareholders’ Agreement, may not be in the forefront of minds when incorporating a company but, it is recommended that some time is spent at the outset to put this in place and Mackinnons are on hand to assist with this.

A Shareholders’ Agreement sits alongside the Articles of Association of the company.  Articles of Association are however more commonly standardised and are publically available documents whereas a Shareholders’ Agreement is bespoke and private.

A Shareholders’ Agreement can therefore provide more detail and set out additional provisions not appropriate for Articles of Association.  For example, good leaver and bad leaver provisions and the return of shares to the company; restrictive covenants for leavers; drag along and tag along provisions; how to resolve a deadlock; and expanding the dividend policy of the company set out in the Articles of Association.

Taking the time to prepare a Shareholders’ Agreement can be an inexpensive way to reduce the potential for disputes by submitting to writing how certain decisions must be made and other practicalities of running a business.

In our experience, family companies are less likely to have a Shareholders’ Agreement; it is only family involved, why do we need one?  In a small family business there can sometimes be only a slight distinction between the directors who run the day to day operation of the business and the shareholders who own the company, or perhaps even no distinction at all.  In law there are certain instances where it is necessary to explicitly refer to this distinction and having appropriate Articles of Association and a Shareholders’ Agreement can assist with the process of achieving this.

Mackinnons Solicitors LLP have a well-respected commercial and commercial property department willing to assist with any business related queries.  In the first instance, please contact Kirstin Ejsmont on 01224 632464 or at kirstin@mackinnons.com

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