Q&A - Shareholders' Agreements - unnecessary expense or crucial to company's future?

28/10/2013

Q: I set up a small IT company two years ago with three friends. We are all directors and hold an equal number of shares. Recently it was suggested that we should have a Shareholders' Agreement drawn up. I feel this would be an unnecessary expense for such a small company. Am I correct?

A:  Whilst every company has Articles of Association, these do not cover the wide range of issues where written agreement prior to any problem arising would be helpful.  Also they are publicly available, whereas a shareholders' agreement is private and confidential.

Currently, you may all be on good terms and working together to make the business successful.  This may, however, not always be the case, and it would be useful for you to have a signed document setting out exactly who will do what in terms of responsibilities and how much time every shareholder will devote to the business and what happens if this ceases to be the case. 

For example, in the future, one of you may wish to devote time to other projects or interests, or spend less time working in the business.  As part of such changes one of you may wish to sell their shares to the others.  It is preferable to have agreed provisions in place from the start, which set out exactly how the shares will be valued and how they will be bought by the remaining shareholders. 

It is also important to have agreement on what decisions require the consent of all shareholders (i.e. unanimity), e.g. employing or dismissing staff, entering into contracts above a certain value (such as a lease), or taking other significant steps in relation to the business.

Whilst there will be some costs involved, a properly drafted shareholders' agreement would undoubtedly help reduce or avoid disagreement between the shareholders in the future.