Five benefits of having a shareholders agreement

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Shareholders agreements are useful for companies with a relatively small number of shareholders, where the potential for deadlock and disagreement is greater.

A Shareholders agreement is an optional document that creates a contractual obligation between shareholders of a company. The benefits of having one include:

  1. Confidentiality
    A shareholders agreement does not have to be registered on the Companies Register, unlike a company constitution which is viewable by the public. The shareholder agreement is only seen between the shareholders in the company. 
  2. Resolution
    Provisions can be put in place to resolve any deadlock between shareholders. This will be particularly important where the shareholder arrangement in a company is 50/50 between two shareholders. The shareholders agreement can provide options for the shareholders where a deadlock exists on a major company decision. One example is having a put/call option where one shareholder can purchase the others shares in the event of a deadlock where a deadlock cannot be resolved.
  3. Pre-incorporation
    The shareholders agreement can be entered into before the incorporation of the company which lets the shareholders have a clearer idea of what they are entering into and the general direction and purpose of the company. This could also include how the shares will be issued and whether initial funding will come from shareholder loans or third party loans.
  4. Flexibility
    The shareholders agreement can be tailored to suit the company’s needs. It may set out how company is structured, the day-to-day operations of the company, how many directors there will be, and the remuneration for the directors. The agreement can be as simple or as detailed as the shareholders want.
  5. Pre-emptive rights
    A large area of a shareholders agreement. This is where the shares can be kept with the remaining shareholders when a shareholder decides to sell. With pre-emptive rights the remaining shareholders are offered the shares to purchase before they are offered to a third party. This may be particularly important in smaller companies where the shareholders only want to deal with other shareholders they know on a personal basis.

We recommend that you contact our business law specialists if you want to know more about shareholders agreements or you think your company may benefit from having one.