A Shareholder Agreement is a business protection document that regulates the relationship between company owners/shareholders. It is a bit like a ‘business Will’, it provides clarity and a process for sorting out who owns what if the business relationship breaks down.
Most companies that are owner-managed by two or more shareholders should think about a shareholder agreement to protect the interests of each shareholder in case the relationship sours or reaches dispute. A shareholder agreement will consider identifying the shareholder roles are setting out a system of making decisions and change management. The roles in a company, including shareholders are governed by the Companies Act 2006, but this does not create any duties or obligations owed to the company by the shareholders of the business. A shareholders agreement will set out the rules and regulations upon which the shareholders, the company and its directors must operate.
With a shareholder agreement, all parties will have a clear understanding of their obligations and rights and also their restrictions or what they can or cannot do without appropriate consent for the other business partners.
A growing company will go through vast changes which put a lot of stress on the relationship between its shareholders. It is not uncommon for company shareholders to reach deadlock on difficult decisions or to fall out completely. In such circumstances, the shareholders agreement will define the correct exit route for the circumstance (including resolution process) so that the company and its business are not threatened by internal dispute.
Often the articles of association will need to be amended so that the documents forming the constitution of the company (its articles of association and shareholder agreement) complement each other. A company’s articles of association are a public document (they are filed at Companies House) and so some of the more personal or specific terms (such as post-termination restrictions) are better suited to the shareholder agreement, which will remain private between the parties.
What is a Shareholder Agreement?
A shareholder agreement is an agreement between all the shareholders of a company.
It is an essential and integral document to any shareholder relationship which allows shareholders to regulate their relationship with each other, the company and its directors.
It provides clarity and direction for all by setting out the framework as to how the company is to be governed and operated. It also helps to mitigate against costly and potentially damaging shareholder disputes, should they arise in the future.
Whilst a company’s standard constitution and the Companies Act 2006 provide some protection for shareholders, it is very limited, and relying on it alone could have a random or unpredictable outcome.
Similarly, Table A of the Companies Act 1985 and the Model Articles within the Companies Act 2006 import default provisions, however, not all of these provisions will be suitable and/or compatible with the wishes of the owners.
For example, standard articles do not permit a compulsory transfer of shares held by a shareholder in the event that such shareholder commits a breach of a shareholders agreement or the articles of association.
Which type of company will need a a Shareholder Agreement?
The circumstances in which you may need to consider a shareholders agreement with your fellow shareholders are:
- If your business has two or more shareholders;
- If you are setting up a new company or starting a new business with others;
- If you are buying a business with others in a new company;
- If you are acquiring shares in an existing trading company (whether new shares or from another shareholder); or
- If you are selling shares or transferring shares to others in your company, whilst retaining a shareholding.
- A shareholders agreement will ensure that your investment, interest and, where appropriate, control of your business is protected and the business can be run in a fair and profitable manner.
Whilst a company’s standard constitution and the Companies Act 2006 provide some protection for shareholders, it is very limited, and relying on it alone could have a random or unpredictable outcome. Similarly, Table A of the Companies Act 1985 and the Model Articles within the Companies Act 2006 import default provisions, however, not all of these provisions will be suitable and/or compatible with the wishes of the owners.
Even if you have already established your business, it is not too late to put the necessary protections in place, to ensure that shareholders are protected in the future. You can look to enter into a suitable shareholders agreement and articles of association at any time.
It is also vitally important that such arrangements are reviewed regularly (and especially when shareholdings are varied) to ensure that they remain suitable.
What topics does a shareholder agreement contain?
The following list highlights questions which can be easily dealt with and answered in a shareholders agreement. These issues would potentially cause major concern and disruption to the business owners without a shareholder agreement in place.
- What happens if a shareholder wishes to sell his/her shares to a third party who you do not know or trust or to someone who wishes to change the direction of your business?
- What happens if the majority of shareholders wish to sell their shares, but a minority shareholder does not?
- What happens if the shareholders fall out or have a disagreement?
- What happens if a shareholder dies?
- What happens if a shareholder wishes to set up a competing business?
- If you do not have day to day involvement in your company, do you want a veto on certain decisions?
A shareholder agreement must provide clarity and direction for all by setting out the framework as to how your company is to be governed and operated in the future and how issues or disputes such as these may be resolved.
How to draft a shareholder agreement
A specialist corporate commercial solicitor can draft the shareholder documents, which will include your shareholders agreement, articles of association and directors’ service contracts.
Each of these documents need to complement the others, ensuring that you have continuity as well as consistent and clear terms.
We will help you to address all relevant points, including the following:
- The proposed nature of the business
- How the company is going to be run and how decisions will be made
- Drag and tag along provisions
- The rights and obligations of shareholders
- How any future contributions will be made
- The procedure for the issue and transfer of shares including pre-emption rights
- Circumstances under which the company may be sold
- The appointment and removal of directors
- Key roles and responsibilities
- Dispute resolution procedures
- Minority shareholder protections
- The payment of dividends
- Non-competition obligations
- What happens upon a shareholder leaving the company (for example on retirement or death)
- Remedies for breach of the agreement (for example, deemed transfer of shares) and appropriate good/bad leaver provisions
- Indemnities between shareholders and/or apportionment of liability