In an ideal world, everyone in business would get along, with no disagreements between owners and a shared vision for the future of the company. Unfortunately, we do not live in an ideal world. This is why a shareholders’ agreement is one of the critical documents essential for companies with more than one shareholder. It can save all shareholders time and money by avoiding legal disputes, especially when shareholders fall out with each other. It can also prevent directors or shareholders from trying to take the company in different directions.
A shareholders’ agreement does not have to be complicated. In its simplest form, it is a legally binding agreement between two or more shareholders in a business. Such an agreement can set out how the business is run, including key provisions like:
- how the company is financed;
- how major decisions are made;
- voting rights of each shareholder;
- how additional shares are to be allocated; and
- how dividends are to be paid.
Additionally, it can address what should happen if directors or shareholders fall out or leave the company due to illness, retirement or even death.
While the company’s constitution (known as the Articles of Association) outlines how a company operates, a shareholders’ agreement sets out the obligations, responsibilities, and expectations for shareholders to the company and to each other. It provides a contractual remedy when things go wrong and helps avoid costly litigation, acknowledging and protecting the shareholders rights and interests of both minority and majority shareholders alike. The agreement details how a company will be run and the role of the shareholders, sitting alongside the Articles of Association and under general company law. It can include bespoke clauses to fit the company’s needs, such as shareholders’ responsibilities, dividend policies, intellectual property rights, share transfer procedures, rights of first refusal, dispute resolution methods, and shareholder protections. Additionally, it provides clear terms for when shareholder consent is required for certain decisions.
You worked hard to grow your company. By putting a shareholders’ agreement in place, you are safeguarding your company and protecting your interests, as well as those of the other shareholders.
Solicitors and accountants recognise that although a shareholder agreement is not strictly necessary in a company limited by shares, it is highly advisable to have one. It becomes even more important when selling shares to a new shareholder, issuing shares to a third party, dealing with future sales of shares, and making significant changes to the company or its business.
Shareholders are bound by the company’s Articles of Association and their obligations under it. However, there is no personal obligation to the company beyond the same. A well-drafted shareholder agreement also clarifies ownership, creating that personal obligation and forming a legal relationship between the shareholders. The agreement gives clear structure to the shareholder and outlines what is required of them in their own shareholders agreement and details what the company expects from the shareholder. In place, a shareholders’ agreement can play a key role in setting out the shareholders’ expectations at the outset, in terms of the company’s governance structure, establishing each shareholder’s personal obligations, roles and responsibilities towards the company.
The agreement is a private document between the shareholders, allowing it to be more detailed than those documents typically filed at Companies House. As such, a shareholders’ agreement can typically include certain provisions such relating to confidentiality/non-disclosure, non-compete clauses and carve-outs (exceptions to restrictions that allow specific activities, such as a shareholder continuing an existing business that would otherwise breach a non-compete clause).
A shareholder agreement can also provide protection for the shareholders. Majority shareholders may wish for protection in the event of a sale, where a third-party buyer wishes to purchase all the shares in the company. The agreement could include a drag-along clause, whereby a shareholder with a stipulated percentage of shares in the company wishes to sell to a third party, has an option to force the minority shareholder to sell their shares to the third-party buyer at the same time. The agreement can also favour a minority shareholder and ensure the shareholder’s ability to restrict certain shareholder decisions with a unanimous vote, overriding what would normally be a majority vote. All these points can be laid out in the shareholders’ agreement.
Finally, a well-drafted shareholders’ agreement would also address what happens in the case of bankruptcy, or if a shareholder dies or becomes incapacitated. This is something that you should consider. You can find out more in our article what happens when a shareholder dies.
Ultimately, a shareholders’ agreement can be very important in the running of most companies, as it not only provides certainty for the shareholders but can protect the success of the company and its business going forward.
Please reach out to Sam Glascow for more information at s.glascow@rfblegal.co.uk, or 020 3961 3116.
Samuel Glascow
Yardımcı Avukat
