The Shareholder Agreement

An invaluable legal “just in case” document

Setting up a business partnership is rather like entering a marriage—replete with heady highs, inevitable lows, the occasional misunderstanding, and, predictably, a rocky patch. Hence, a Shareholder Agreement is not merely advisable—it’s indispensable.

If you find yourself among fellow shareholders (and not merely dallying with option holders), it’s high time to remedy any absence of such an agreement. Its primary purpose is to safeguard the interests of you and your principal co-conspirators, particularly in the context of a limited liability company—a structure your clients will likely insist upon. Essentially, it codifies the basics of operating your enterprise: when to consider a sale and how to shield yourself from the unsavoury antics of a partner engaging in dubious side deals, for instance.

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Since every venture is apt to hit a rough patch, straining even the sturdiest of relationships, you must decide whether to design “divorce” to be a walk in the park or a bureaucratic slog. We opted for the latter—a deliberate choice to deter hasty, emotion-fuelled decisions, as enshrined in our own 57-page Hogarth Shareholder Agreement, prepared by media-expert legal firm Lewis Silkin.

For your amusement—and perhaps enlightenment—here’s a summary of the topics it covers:

•  Designating the firm’s auditors, company secretary, and legal advisors;
•  Ensuring that all transactions are conducted at arm’s length;
•  Obligating the maintenance of various types of insurance;
•  Specifying the content and deadlines for monthly and annual accounts;
•  Safeguarding the corporate form and status of the business;
•  Defining the procedure for appointing new directors;
•  Imposing financial borrowing limits;
•  Setting restrictions on loans to directors;
•  Outlining directors’ remuneration;
•  Capping the value of contracts that any shareholder may enter on behalf of the firm;
•  Specifying the identity of the directors;
•  Detailing the mechanism for raising additional capital;
•  Regulating the transfer of shareholdings;
•  Prescribing the process for winding up the business;
•  Upholding the confidentiality of business information;
•  Empowering the company to enforce its rights against recalcitrant shareholders;
•  Stipulating non-compete arrangements; and
•  Determining the dates at which a sale—or “realisation”—of the firm might be contemplated.

Admittedly, the sheer scope of these provisions may seem daunting. Yet remember, this document is designed to protect you. In its absence, I have witnessed founders embroiled in disputes that are as stressful as they are unsavoury. By prioritising the creation of a robust Shareholder Agreement, you can sidestep such pitfalls and secure a smoother business journey.

In short, consider this a grown-up business document. Now, do yourself a favour and get on with it.