Shareholder's Agreement and its Significance

A shareholder's agreement is a legal arrangement among the shareholders of the company. The main motive behind the establishment of shareholder agreement is to protect the shareholder's investment in the company. Further it establishes fair relationship between the shareholders and govern how the company should be run.

Specific, important and practical rules relating to the company and the relationship between the shareholders shall be stated in the shareholder's agreement.The shareholder's agreement can be beneficial both to minority and majority shareholders.

Benefits of Shareholder's Agreement

Help the Majority Shareholders

 Shareholder agreement helps the majority of the shareholder in the multiple ways. The shareholder agreement contains the rule of share transfers and selling. As in case, the majority shareholder desires to sell their shares but a minority shareholder is unwilling to agree then including a provision forcing that shareholder to sell their shares is important. This provision is often referred to as a drag along provision. Further, a provision in the agreement can be made in order to prevent minority shareholders passing on confidential company information to competitors or setting up rival businesses.

Helps the Minority Shareholder's: 

Generally, all the major decisions of the company are taken by the majority shareholders. Minority shareholders have a very little control over the running of the company. Even if the articles of association include provisions that protect the minority shareholders, these provisions can be changed via special resolution by holders of 75% of the shares. There are laws that provide limited protection to minority shareholders but these can be costly to enforce and may not achieve the required redress.

Shareholder's agreement helps the minority shareholders to have a say in the major decision taken for the company. These major decisions may include the decisions on the issue of new shares, appointment or removal of directors, taking on new borrowings or changing the main trade.However, if the shareholder's agreement requires all decision to be unanimous this could cause problems and ultimately prevent your company carrying out its business.

Confidential 

The shareholder agreement is a private document which cannot be seen by the outsiders like creditors or non-employee members. Unlike articles of association which is a public document made available at Companies House and can be reviewed by any non-member or a creditor.

Raise Finance

Presence of the shareholder's agreement assist the company in raising funds and reflects the stability of the company among the potential members.

Safeguard Shareholder's Financial Interest

Shareholders agreement prevents situations where changes in one shareholder's personal circumstances can have an effect on the company or other shareholders within the company. It protects each shareholder's financial interest in the company, and the interests of the shareholder's families in the event of the death of a shareholder.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.