Shareholder agreements: why bother?

A bit like pre-nups before marriage, shareholders agreements are often seen as a sign that you expect things to go wrong.

In reality, however, a shareholders agreement is just a contract between shareholders of a privately owned company setting out how they intend to manage the company, protecting shareholders and the company itself.

Similarly, many companies that operate as partnerships do not have a shareholders agreement in place at the time of incorporation. Although shareholders often start out on the same page, shareholders agreements can come in extremely useful; especially if the relationship turns sour.

If, for example, a shareholder were to die, the absence of an agreement setting out what happens to shares in the event of death could leave relatives of the deceased retaining a shareholding in the company. Most likely, this would not to be a favoured outcome for the remaining shareholders.

Without a shareholders agreement in place, Company Law prevails, perhaps leading to outcomes that are not in the best long term interests of the company and almost certainly being likely to go against one or more of the shareholders’ wishes.