When should we put a share agreement in place?

Usually, it is best to put a shareholders’ agreement in place when you form the company and issue the first shares. In fact, it can be a positive exercise to ensure there is common understanding of shareholders’ expectations of the business.

At that point, the shareholders should, as far as is possible, be of a similar mind about what they expect to offer and get from the company. Indeed if the differences of opinion between you at this stage are too strong to form a shareholders’ agreement, it is likely to ring warning bells about the nature of your future working relationship.

When should we put a share agreement in place?

You may choose to defer discussing a shareholders’ agreement in order to get on with the important task of establishing the business. While you may have every intention of return to it at a later date when there is more time, the appropriate opportunity may not arise and something else always takes priority.

Even if you do pick it up later, by then the shareholders’ expectations and feelings towards the business may have diverged, making it more difficult for them to agree to the terms that should be included in the shareholders’ agreement.

What should I ask to be included in a shareholders’ agreement?

This, as described above, will depend on your level of shareholding and the number of your fellow shareholders.  The key provisions, however, that you should consider including in a shareholders’ agreement are those relating to:

• Issuing and transferring shares – including provisions to prevent unwanted third parties acquiring shares and how a shareholder can sell shares.
• Providing some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders.
• Running the company – including appointing, removing and paying directors, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company.
• Paying dividends
• Competition restrictions
• Dispute resolution procedures

We will look at these and other things you might want to include in a shareholders’ agreement in a forthcoming article.

It is possible that the contents of the shareholders’ agreement may overlap with other company documents, particularly the articles of association. The articles will, for example, contain provisions relating to decision making and transfers of shares and in another article we explored what investors should look for in a company’s articles of association.

Consider seeking legal advice if you are not sure which provisions to include in which documents, but overall do ensure that the shareholders’ agreement and articles of association are consistent with one another.

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