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Do I need a shareholder agreement for my new startup?

Good job! You’ve incorporated your brand new startup, and now you’re looking to grow your business. Hopefully, you have a few shareholders already. Your next step is to consider creating a shareholders’ agreement.

We know it might seem unimportant at the moment, but making a shareholders’ agreement is a vital step in protecting the fate of your business. Also known as a founder’s agreement, a shareholders’ agreement will regulate how company changes are made in the future.

 

What is a shareholders’ agreement?

A shareholders’ agreement is a legal contract, agreed to by all company shareholders, as a precautionary measure regulating the way they conduct business. It can form a basis for the procedures that should be followed should any unforeseen issues arise between your stakeholders and the company itself.

This protects the success (and consequent value) of your company. Plus, there’s no need to worry about confidentiality, as the terms of a shareholders’ agreement are not required by Companies House.

Though they’re often confused, a shareholders’ agreement is not the same as the company’s articles of association. Articles of association form the basis of a statutory contract between the shareholders and the company. It acts as the company’s constitution and must be filed at Companies House.

 

What does a shareholders’ agreement do?

The shareholders’ agreement sets out the obligations of each shareholder, as well as an outline of how the business should operate.

It also covers:

 

  • What to do if a shareholder leaves, passes away, or files for bankruptcy
    To future-proof your company, your shareholders’ agreement needs to set out a mechanism for the loss of a shareholder. It may be wise to dictate that; in the event of a loss; the shareholder in question must offer their shares for sale internally before they’re put before third parties.
  • Veto rights
    Reserved matters (or veto rights) dictate who gets responsibility for day-to-day management of the company. In the shareholders’ rights, you can provide shareholders with the right to consent to specific decisions that should not only be left to the discretion of directors.
  • Restrictions
    In the interests of your startup, you may want to restrict any shareholders that decide to leave from starting a competing business. This can be set out in the shareholders’ agreement and will play a crucial part in maintaining the value of your company.
  • Future issuing of shares
    If you want to protect the subscriptions of existing shareholders, dictate that their rights be written into the shareholders’ agreement. This will ensure that in the event that future shares are sold, existing shareholders do not find themselves diluted.

 

Why get a solicitor involved in my shareholders’ agreement?

The shareholders’ agreement is one of the most important legal documents for your company. It’s going to provide a point of reference for many future decisions, some of which could be very complicated without it.

At Sweeney Miller, we’re experts in corporate law. We’ll be able to work with you on the drafting and finalisation of your shareholders’ agreement to make sure this crucial piece of documentation is correctly tailored to benefit your startup.

 

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