When founders decide to set up a new company, understandably the need for a shareholder agreement or bespoke articles may not feature high up their “to-do” list. Faced with a myriad of operational demands and funding requirements, founders could be excused for filing the need for a shareholder agreement into the “nice to have – but let’s look at later” drawer.

However, we see countless scenarios where new clients have very much wished that they had made the time and sat down with other founders/investors to discuss how the new venture will be run. Without the proper corporate foundations, it often means that management issues and ownership challenges will fester and blow up in the future without any agreed guidance as to how they will be resolved. The main purpose of a shareholder agreement is to air, discuss and agree key management and ownership issues so that the agreement can then hopefully be placed in a drawer and not see the light of day again! Without a shareholder agreement in place, the most common issue we see is an exiting founder who is leaving the business with all their shares, and the other management team members are aggrieved when they suddenly realise that they have no way of getting the shares back. However, the shareholder agreement and articles will also set out a myriad of other agreed provisions, meaning that the founders are then able to concentrate on the important task of growing the new business.

Shareholder agreements FAQs

In the simplest terms, articles are a publicly available document filed at Companies House setting out the provisions relating to the way the company is going to be operated and owned. Shareholder agreements are private contractual documents which often are introduced at the time the company is set up or when investment comes in. A shareholder agreement will often contain clauses such as restrictive covenants binding on key directors; agreement between the shareholders as to how the company is going to be funded, and when dividends are going to be extracted.

Increasingly we are seeing clients dispensing with shareholder agreements at the time of incorporation and setting out key provisions, such as share rights and leave provisions, in articles of association only. Shareholder agreements are then introduced at the time that material third party investment is introduced into the company.

They are usually to protect both. An investor will require key minority shareholder protections before getting out the cheque book. These could include, for example, the right to serve on the board; sign off on key operational matters and tag along rights (which allow them to sell at the same time as the majority exit). Equally majority shareholders will often try to lock in key rights and control of the board.

If there is a large investment being made in the company, warranties from the company and founders may often be contained in a subscription agreement, with a separate shareholder agreement setting out day-to-day operational issues.

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