I am sometimes asked this question by people starting a business or bringing in partners. "My company has standard articles of association - is this enough?"
I've been involved in businesses and have advised others, both with and without a shareholders' agreement. Some have worked fine, but issues have arisen with others.
The problems can arise when certain things happen:
This can be the main benefit of a shareholders' agreement. The agreement deals with a series of future scenarios, and the signatories discuss these thoroughly and work out their views with the help of experienced advisers.
Another advantage is that the shareholders' agreement is private, while articles of association are a public document, filed in the Companies Office.
Entrepreneurs may encounter a shareholders' agreement for the first time when negotiating investment from an experienced angel investor or venture capital fund. Investors have cash at risk and are detached from day-to-day management, so need additional protection.
Typical matters covered in a shareholders' agreement are a list of important actions that require a particular majority decision, plus share dealing terms - offer round, tag along and drag along. I may cover these in future posts.
So, do I believe a shareholders' agreement is a good idea? The answer is yes, but make sure you do the thinking properly at the start.
I've been involved in businesses and have advised others, both with and without a shareholders' agreement. Some have worked fine, but issues have arisen with others.
The problems can arise when certain things happen:
- An individual's circumstances can change and their attitude to the business alters accordingly. This can affect their view on salary, dividends, investment, growth strategies, risk taking, sale of the business, etc.
- A transaction or event emerges that was not envisaged at the start, or was not properly considered - a founder wants to leave, an offer is made for the business, a founder wants to sell his/her shares, etc.
This can be the main benefit of a shareholders' agreement. The agreement deals with a series of future scenarios, and the signatories discuss these thoroughly and work out their views with the help of experienced advisers.
Another advantage is that the shareholders' agreement is private, while articles of association are a public document, filed in the Companies Office.
Entrepreneurs may encounter a shareholders' agreement for the first time when negotiating investment from an experienced angel investor or venture capital fund. Investors have cash at risk and are detached from day-to-day management, so need additional protection.
Typical matters covered in a shareholders' agreement are a list of important actions that require a particular majority decision, plus share dealing terms - offer round, tag along and drag along. I may cover these in future posts.
So, do I believe a shareholders' agreement is a good idea? The answer is yes, but make sure you do the thinking properly at the start.
