Can I write my own shareholder agreement?

‘I’m looking at creating my own shareholder agreement. Can I write one myself?’

You’re a busy entrepreneur, we understand. You may rarely have a moment to yourself. It might seem like a good idea to draft your own shareholders’ agreement to save money but drafting your own shareholder agreement can mean that you may miss out vital clauses, which may burden your business in the future.

A shareholders' agreement is a contract between the owners of a business. It regulates their relationship and contains certain protections designed to guard against the most common issues and disputes that can arise between business owners, such as what to do if you can’t agree on a decision and the company is deadlocked.

Shareholder agreements usually grant veto rights to certain shareholders, or to a majority. This list of reserved matters can be dependent on context. Without experienced advice, you could miss out key rights which are beneficial to your business, or drafting which allows for flexibility or certainty in the future.

We list below a few key reasons why you should not draft your own shareholders’ agreement and why it’s best practice to always consult corporate law experts.

Online templates set you up for failure

Often, templates found on the internet do not care for context – what may work for one company, may not be fit for another, and this applies to legal drafting of documents. If you have specific plans or specific key concerns for the future, taking expert advice is the best way forward to ensure this context is reflected in your shareholder agreement. In certain circumstances, accounting or tax advice may be needed.

Drafting shareholder agreements without expert advice could put you at risk of including provisions which may be deemed by a court as invalid. This can be problematic if it’s a covenant or a clause which the company expected to be able to rely on.

Attention to detail is key

Careful attention should be paid to the relationship between the shareholder agreement and the articles of association. Here are some aspects to consider:

• What happens in the event of conflict between the articles and the agreement?
• Which document will take priority?
• What will happen if there is confusion between the documents?

Deadlock issues

Initial ideas on how a company should be governed are great at the outset and important to consider, but you also need to ensure you’re giving due attention to what happens in the event of conflict or deadlock in the future. Without expert legal advice, there’s a risk that the company may end up trapped in deadlock, and unable to make key decisions when needed. This could result in resolution methods being harder to navigate than they should be. A period of deadlock can be at best inconvenient and at worst, disastrous for a company.

Future planning

You’ll need to consider how your shareholders’ agreement will pave the way for future development of your company, answering these questions:

• Does the shareholders’ agreement allow efficient fundraising in the future?
• What occurs if one shareholder wishes to sell but another doesn’t?
• Who can make major decisions as to the future path of the business?

These questions can only be properly answered by a corporate law expert who has been there before and understands how to resolve these issues in advance via correct legal drafting. Getting this information right from the outset can help your business achieve greater success in the future.

What should I do next?

We’re experienced in advising clients as to the terms of their investment, and the contractual rights they will have thereafter, at or before the point of investment. For more answers to frequently asked questions and guidance on shareholders’ agreements, deadlock and more, consult our corporate solicitors. Get in touch on 0800 689 1700, email us at enquiries@harperjames.co.uk, or fill out our short enquiry form.