What is a shareholders agreement?

Directors deal with the day to day running of a company, whereas few decisions are referred back to shareholders for approval unless specifically outlined in the company’s articles of association or the Companies Act 2006.

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A shareholders’ agreement works in conjunction with the articles with one key difference; it is a private agreement between the parties who enter into it and is therefore not available to the general public.

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The agreement is there to regulate the conduct of the shareholders who are party to it in relation to how they act within the company.

What do they cover?

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Each shareholder and company is different and therefore each shareholders’ agreement will be different.  There are a few key areas on which decisions will need to be made and every shareholder should take these into consideration when entering into this agreement.

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Share Transfers

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There are a number of things to think about here and here is a non-exhaustive list:

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What is to happen when one shareholder wishes to sell his or her shares voluntarily? There are no statutory requirements stating shares must be offered to existing shareholders before a third party.

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What is to happen when a shareholder dies? Those shares may have a value (potentially significant) and therefore who is to derive the benefit of dividends and any future sale amount? Are the shares to pass in accordance with the shareholder’s Will to a family member who may never have been involved in the company before or are they to be purchased for value by the surviving shareholder(s)?

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Directorships

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Depending upon the set-up of the company, are any shareholders to be given specific rights to appoint a director?  This could be, for example, where a shareholder has invested into the company and has no day to day responsibility to run the company.  Such a director may want the ability to ‘step in’ to protect their investment should the need arise.

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Decision making

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The shareholders may want to take certain decisions out of the control of the directors by only allowing those decisions to be made with ‘shareholder consent’.  This could include, for example, imposing restrictions on spending.

Why is it important to have a shareholders agreement?

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There is no requirement for the shareholders of a company to enter into a shareholders’ agreement.  Where there is more than one shareholder, it is usually wise to do so as soon as a company is incorporated as the agreement can provide protection for all parties, outline the expectation of how the company is to be run and provide a way to minimise any potential business disputes.

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In some circumstances, shareholders rely on the closeness of relationships between each other and this can be problematic if things turn sour.  Without adequate dispute resolution mechanisms for example, this could cause unanticipated disruption for a company.

Other points that may need to be considered

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There are many other matters to consider including (as a non-exhaustive list):

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Are any shareholders permitted to ‘drag along’ any other shareholders to force a sale of the shares in the company to a third party?
Will any shareholder have the ability to ‘tag along’ to any share sale proposed by another shareholder?
How are disputes to be resolved between the parties?
Are there to be different share classes with different rights to vote, different rights of entitlement to dividends?

How can EHL help?

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This introduction to shareholders’ agreements is intended to provide you, the reader, with information and does not replace the need for legal advice tailored to suit your business needs.
Appropriate care should be taken when preparing a shareholders’ agreement and our experts are here to guide you through your options and what is best for you in your individual circumstances whether you are a shareholder or a company.