News and Events

Does my company need a Shareholders Agreement?

View profile for Karen Edwards
  • Posted
  • Author

Each share in a limited company carries a number of votes. These are referred to as ordinary shares and usually carry one vote per share. A majority of over 50% will control the company. Using a shareholders agreement protects a minority from being exploited and provides a more equal distribution of power.

Karen Worth, a Solicitor in our Commercial Team, says “A shareholders agreement will regulate the relationship between shareholders and set out limits for director-shareholders. It is your ‘wish list’ and what it contains is entirely up to you.”

Small businesses normally have three sources of income:

  • Borrowings
  • Cash subscribed for shares
  • Profits of the company re-invested

It is also worthwhile protecting ‘intellectual property’ by incorporating provision in the shareholders agreement. The name of a company, copyright etc can be very valuable. An exit strategy should also be considered – especially if you have loaned the company money and want it back by a specified time. No one can predict the future and one alternative is to set down a statement of intention. This is not legally binding but serves as a reminder of the time frame. The lender may have a separate loan document and this provides the right to enforce action.

Another alternative is to make provision for precise events that may occur in the future. These might include:

  • The sale of the company
  • Shareholders buying out other shareholders
  • The sale of the business out of the company
  • Seeking to ‘float’ shares
  • Seeking third party finance
  • The company selling assets and being wound up

Karen concludes “There are many areas to be considered in setting out a shareholders agreement and I will be happy to guide you through them. please contact me if you would like to discuss this further at a free initial meeting.”