Why are Shareholders and Directors agreements important?
Every limited liability company will be made up of a number of shareholders and directors. Sometimes, these positions can be occupied by the same person! When deciding to set up a limited company, it’s important to choose your directors and shareholders carefully, especially if it’s a family business with a lot of close relationships. This article will help you understand what these agreements are for, what you should think about when putting them in place and the differences between the shareholder and director roles within a limited company.
What’s the difference between the director and the shareholder of a company?
A shareholder is someone who owns and controls a limited company through the ownership of one or more shares. Sometimes these can be acquired through purchasing them, other times they can be received in exchange for investment and funding from the likes of angel investors or venture capitalists.
Directors are appointed on behalf of these shareholders to manage the company. They may also have ownership, or they may not; sometimes a shareholder of a company can also be appointed as one of the directors.
Why might you need agreements?
Sometimes unforeseen situations may come up when in business. There could be changes to the duties of shareholders and directors – for example, some may leave their job or pass away, or some may just be removed from their position within the company. This is why it’s extremely important to draft up agreements that both parties sign off on before the company begins business, as it will avoid any unpleasant or time consuming battles. This can especially be the case if there are close family or friends running a business together, as disagreements can often get deep and personal. Having everyone agree to a set of terms can stop this from happening!
What is the purpose of a shareholder’s agreement?
In the UK, a shareholder’s agreement (by law) is a contract between the shareholders of a company in which the terms of agreement on how the company will be run is set out. The shareholders agree that they use their voting power within the company to make sure the terms of this agreement are held up for as long as they are shareholders in the business. Realistically, this should be used when there is more than one shareholder, as it helps to keep things on course and avoid a lot of internal conflict. It’s particularly important for minority shareholders, who benefit from this agreement if a majority shareholder tries to use their power to influence the direction of the company too much.
Since shareholders are responsible for ownership and therefore the overall direction of the company, a lot of the decisions they make will affect the future of the business. Naturally, if a small group of majority shareholders wants to make a decision that many minority shareholders disagree with, the minority shareholders will want to block it. Allowing the power of a few majority shareholders to dictate the actions of the company is not something the rest of the shareholders want; they may only have a small share, but they still have some ownership of the business. Having a shareholders agreement can detail which decisions require all the shareholders to agree before they are implemented.
Do directors need agreements?
Although they may not actually own the company itself like shareholders do, directors are a crucial element of any company and are integral to the growth, planning and overall direction a business finds itself heading in. Some shareholders can also appoint themselves as directors of the company, so it can be important to have an agreement set out for the roles of directors as well. Directors can be employees of the business, so like with any other employee, there should be clear terms set out in a contract that they need to comply with, such as:
- The requirement for the director to act in the best interest of the company at all times (this is particularly important for those directors who also hold shares in the company, so their power does not influence any of the decisions they make as director.)
- Protection of sensitive information – directors will often have access to sensitive and private information about your client’s details and personal data. You will want to make sure none of this is disclosed to people or parties that should not have it, even after the director stops working for your company.
- A strategy for a clean break – your directors should know exactly how they will be treated if they leave, especially if they also happen to be shareholders. A situation may arise that could turn sour, such as if the director no longer wants to be an employee but wants to have control over the direction of the company as they still have shares.
The Bottom Line
Whether it’s an employee, a director or a shareholder, it is always beneficial to have agreements set out between those with ownership and influence over the company. Agreements make sure that all decisions are made in the best interests of the business, that relationships don’t turn ugly and disagreements about decisions are kept to a minimum. If you’re looking to start a limited company or wondering how to divide up the power and shares in your business, we strongly recommend that you and any other shareholders and directors agree to a contract, preferably before you even begin business. It will save a lot of unnecessary conflict and in-fighting, should even the smallest of disagreements crop up!
Hopefully this article has clued you in a bit more about the roles of shareholders, directors and the need for agreements. If you have any other concerns or questions about this or any other aspect of business or accountancy, then please get in touch with us here at Cubed Consultancy.
We are a Hertfordshire based consultancy company headed by two chartered accountants, Mark and Richard. With years of financial experience between us, we work closely with all types of clients, whether they are individuals or businesses, in order to tailor to everyone’s unique financial needs and requirements. Get in touch with us today and book a free consultation call via our website!