Many companies rely on the terms contained in their articles of association or an unwritten understanding between the shareholders and directors to control how a company operates. Whilst this may work the majority of the time, it leaves room for uncertainty if any dispute arises which can lead to expensive litigation.
Whilst it may not always be the first priority when trying to get a new venture off the ground, a properly drafted shareholders agreement can protect all parties and can be more tailored than the articles of association as it is not a public document.
In a recent matter I dealt with, when a shareholder died his fellow shareholder was left running a company with the ex-wife of the deceased. This was because there was no shareholders agreement dealing with the ownership of shares in such a situation. In the end the relationship broke down to such an extent that the company had to be liquidated incurring significant professional costs.
This shows that whilst it might seem like an unecessary inconvenience now, a shareholders agreement can be an investment that pays dividends in the long term.
A shareholders’ agreement is, as you might expect, an agreement between the shareholders of a company. It can be between all or, in some cases, only some of the shareholders (like, for instance, the holders of a particular class of share). Its purpose is to protect the shareholders’ investment in the company, to establish a fair relationship between the shareholders and govern how the company is run.