Shareholder Agreements

If you are the owner or manager of a company with more than one shareholder then you are likely to benefit from having a shareholders’ agreement to sit alongside your articles of association. The reason is that, while your articles will provide you with a basic road map for dealing with company affairs and relations between members, a shareholders’ agreement will give you a detailed operating manual which covers a much wider range of issues and helps you to keep any sensitive information private.

It is not something you are legally obliged to have, but is something we thoroughly recommend for new business start-ups and established companies alike and which we can usually provide for a fixed fee.

Key advantage of having a shareholders’ agreement

The main benefit of having a shareholders’ agreement is undoubtedly the fact that, unlike your articles of association which must be filed at Companies House and are therefore available for everyone to see, your shareholders agreement is private.

It therefore provides an ideal means of agreeing the internal workings of the company and relations between members which you would prefer not to openly publicise, such as your policy on the payment of dividends and directors’ bonuses.

It also provides an opportunity to build in protections for members not commonly found in most company’s articles of association, such as restrictions on the sale or transfer of shares to unconnected third parties and on the activities of directors and members following their departure.

What sort of issues does a typical shareholders’ agreement cover?

While every agreement is different, some of the most common issues addressed by the shareholders’ agreements are:

• whether there are any decisions of such fundamental importance to the company that they ought to require unanimous shareholder consent;
• whether there are transactions for which prior shareholder approval ought to be sought before a director can commit to them;
• whether the directors should be subject to non-compete provisions while working for the company and for a set period following their departure;
• whether director-shareholders should be obliged to sell their shares if they choose to leave the company or are dismissed;
• whether the shareholders should have the right to remove a director who is under-performing;
• whether the shareholders should be subject to an obligation of confidentiality and any other duties to ensure decisions are taken for the benefit of the company and its members as a whole;
• what happens where a deadlock situation occurs — should one person have a casting vote or should the matter be determined by an independent arbiter?
• when can a dividend be paid and how it should be calculated;
• in what circumstances should it be possible to call on the shareholders to increase their capital contribution;
• in what circumstances can the company make a fresh issue of shares and should there be an obligation to issue to existing shareholders first;
• what happens where a shareholder wants to exit the company — should the company or other members have a right of first refusal and, if not, should restrictions be imposed on who the outgoing shareholder can sell to;
• should an outgoing shareholder be subject to post-departure restrictions;
• how should an exiting member’s shares be valued and should there be a discount applied to the shares of minority shareholders or those who leave under a cloud;
• should there be a right to expel a shareholder proved to be guilty of serious misconduct?
• what happens where a shareholder dies or is made bankrupt;
• what happens if the majority shareholder wants to sell the company — should they be able to force the minority shareholders to agree under a drag-along provision;
• what happens if the majority shareholder is asked to sell their interest alone — should they be obliged to make it a condition of the sale that the interests of minority shareholders are acquired too pursuant to a tag-along obligation;
• whether there should be restrictions on the ability of members to force the company into liquidation, save for in the case of genuine insolvency;
• whether there should be safeguards build in to prevent the interests of minority shareholders being ignored; and
• how disputes between members and directors ought to be resolved.

How can we help

Our commercial solutions lawyers can help you to create a shareholders’ agreement tailored to your specific needs, which works well for your members and complements your articles of association. We can also help you to update the agreement as your company grows and as new members join and older members leave.

We are experienced in creating shareholders’ agreements for new corporate start-ups, for established companies who did not consider the need for such an agreement when they were formed, for companies going through a corporate restructure or a merger or acquisition and for private and commercial investors, particularly under equity financing arrangements pursuant to a joint venture initiative.

It is not just shareholder agreements that we can help with. We can also support you in a share sale by negotiating the terms of a share purchase agreement and in shareholder disputes by working alongside our dispute resolutions team.