Shareholder’s or Gentleman’s Agreement?

So you have started a company with either friends, family or peers and while a degree of trust is necessary, business tests even the strongest relationships.

The key to surviving that test would be to provide certainty in order to avoid having to cash in on that hard earned trust, thereby preserving its value. To achieve this, it would be foolhardy to rely on some form of gentleman’s agreement; if the parties are serious, it is worth putting pen to paper.

Nevertheless, the owners of a company would usually prefer that any agreement be private, even if this contradicts the principles of transparency required in order to form and run a company. For example, the Articles of Association, being the rules by which a company is regulated, are required to be filed at Companies House and made publically available.

However, shareholders may wish to form private and more confidential arrangements between themselves which only they know about; if so, they can enter into a shareholder’s agreement which is an enforceable contract between the parties without the need to share this with the general public.

What could such a private agreement contain? Being subject to contract law, if it is to be enforceable it must, at the very least, be lawful. Other than that, a shareholder’s agreement can contain anything that the shareholders want or desire.

A word of warning though: if the parties wish to enter into such an agreement without legal advice, at best they may not think of all the matters which should be included thereby reducing its effectiveness, or at worst, the agreement may not be enforceable at all. An experienced solicitor should be able to guide you through the process and prepare and negotiate an agreement that satisfies all the parties.

Please contact Sing Li, Solicitor on 01582 514 356 or by email on [email protected] if you would like to discuss the matters raised in this article or any other aspect of commercial law.