Many people will have heard of shareholders, but what does it actually mean to own a share in a company? Whether someone owns just a few shares or has a larger stake in a company, being a shareholder comes with certain rights, but it doesn’t necessarily mean having a say in how the business is run.
A limited company has its own legal identity, separate from the people who own and manage it. The level of influence shareholders have will depend on their voting rights and how much say they have in the company’s decisions.
This is where a shareholders’ agreement can help. But what exactly does it cover, and why is it important?
A shareholders’ agreement is a legal contract between the shareholders of a company. It sets out their rights and responsibilities, as well as how they will deal with the business and each other. It helps establish clear expectations from the outset, particularly where there are several people with different levels of ownership or involvement.
The agreement can cover a range of things, including how many shares someone owns, voting rights, access to company information and entitlement to dividends. It can also explain how shares will be valued if someone wants to sell, alongside confidentiality requirements and how disagreements should be handled.
Importantly, it should look beyond the day-to-day running of the company and consider what might happen in the future. For example, shareholders may have the opportunity to buy additional shares, or the company may be able to buy back shares in certain circumstances. These arrangements can involve specific rules and deadlines, so it’s important that everyone understands what is required to avoid missing out on an opportunity.
There isn’t a standard agreement that suits every business. The terms should reflect the company, its shareholders and how they want things to work. This is why it’s important to think carefully about the arrangements before anything is signed.
For anyone considering buying into a company, it’s also worth finding out as much as possible about the business first. This means looking at its financial position, understanding its legal structure, checking whether there are any charges registered against it and reviewing its filings at Companies House.
It’s not just about the paperwork, either. A company’s reputation, how it operates, who works there and how it’s viewed within its industry can all help build a clearer picture of the business. Understanding the legal and financial details isn’t always straightforward. Where there is uncertainty about what to look for or what certain arrangements mean, professional advice can be helpful. A solicitor can explain the terms of a proposed agreement, highlight potential issues and help ensure shareholders’ interests are properly protected.
It’s worth remembering that a shareholders’ agreement should be the result of proper discussions and negotiations, rather than something to rush through when shares are being bought. Like other important legal agreements, it should reflect what everyone has agreed, including the financial arrangements and each person’s rights and responsibilities.
It’s also important to consider what might happen if things don’t go to plan. Agreeing how a company will operate when everything is going well is one thing, but it’s just as important to think about disagreements, changes in circumstances and situations where someone wants to leave or sell their shares.
This is particularly relevant because shareholders and the people running a business don’t always have the same priorities. Shareholders have invested money in the company and may want regular updates, a say in important decisions and a return on their investment through dividends or eventually selling their shares.
Those managing the business, on the other hand, will want enough freedom to make everyday decisions without having to consult shareholders about everything. They may also prefer to keep profits in the business rather than pay out larger dividends.
A shareholders’ agreement can help balance these different interests. By making everyone’s expectations clear from the beginning, it can reduce the risk of disagreements and provide a way to deal with them if they arise.
Owning shares in a company involves more than simply having a financial stake in the business. Understanding the rights that come with those shares, how decisions are made and what happens if circumstances change is important for everyone involved.
A well-considered shareholders’ agreement helps bring everyone onto the same page, protecting the interests of those who have invested in the company while giving the business the structure and flexibility it needs to operate and grow.
John Roberts is a Partner and Director at Austin Lafferty. John has been with the firm for almost 20 years, with experience in all areas of business law
