SHAREHOLDERS' AGREEMENT

A guide on the practicalities of drafting a bespoke shareholders' agreement

A well-drafted shareholders' agreement can offer individual shareholders protection and a sense of direction in cases of dispute and deteriorating relationships. We hold a wealth of expertise in this area and can guide you to ensure you have a clear exit strategy in place.

WHY A SHAREHOLDERS' AGREEMENT

A shareholders' agreement is a private agreement between the shareholders of a company (unlike the company's articles of association, which is publicly available) which:

regulates the relationship between the shareholders;
governs the management of the company; and
outlines the personal rights and obligations of each member.

Such an arrangement is useful for private limited companies, joint ventures and even management buyout transactions to set out rights attaching to shares and regulate their transfer.

In conjunction with the company's articles of association, you are guaranteed to have the correct safeguards in place for each shareholder in the event of dispute or uncertainty.

The lack of procedural requirements is a quality factor of a shareholders' agreement. As there is no legal requirement to register such arrangement with Companies House, you can guarantee a completed shareholders's agreement within a short period of time.

SHAREHOLDERS' AGREEMENT VS. ARTICLES OF ASSOCIATION

Do you need a shareholders' agreement when you have articles of association? The short answer is yes, it is advisable to do so. Much debate revolves around the practicalities of a shareholders' agreement when rules of company governance and safeguards have already been implied by the Companies Act 2006 (CA).

Suppose you have recently set up a company as a sole director and shareholder using standard articles. You later appoint two shareholders, holding together over 50%. An ordinary resolution (simple majority of over 50%) will enable the other shareholders to terminate your appointment as a director (s168, CA), despite you having set up the business yourself. To prevent this, you may include a clause requiring a unanimous vote for the aforesaid.

Other key differences are:

shareholders' agreements are less standardised and restrictive, thus favourable to smaller businesses who want to simplify and fit the specific needs of the company and its shareholders;
amending articles will require a special resolution (75% or more), whilst a shareholders' agreement may be revised with a unanimous vote or a super-majority approval; and
unlike articles of association, a shareholders' agreement is private and confidential.

WHAT TO INCLUDE IN A SHAREHOLDERS' AGREEMENT

We recommend you draft a bespoke shareholders' agreement tailored specifically to your company's needs. Therefore, avoid simple templates and reach out to a legal professional for expert assistance. Below are some areas we recommend you include in addition to general information regarding your company.

CONTRACTUAL PROVISIONS PROTECTING MINORITY AND MAJORITY SHAREHOLDERS

Any persons with less than 50% shareholding (minority shareholder) will have very little management controls and power against majority shareholders. For this reason, specific clauses may be included to rebalance power notably:

tag-along provisions, to ensure minority shareholders receive the same return as their investment; or
clauses requiring the consent of all shareholders on all principle matters.

Equivalently, majority shareholders need to be assured minorities will not make decisions unfavourable to other shareholders. Clauses which may provide greater safeguard measures include:

drag-along provisions; or
provisions strictly setting out when and to whom shares can be sold.

SHAREHOLDERS' INVOLVEMENT IN COMPANY DECISION-MAKING

Including provisions which require and allow shareholders' involvement on crucial matters affecting the company is a way for shareholders' interests to be protected. Example of such matters include the appointment and termination of directors.

DIVIDENDS

It is crucial that you include a dividends policy in your shareholders' agreement, to reflect the different rights attached to each shareholding.Dividends are an important source of profit for shareholders and should not be mentioned vaguely.

TRANSFERS OF SHARES

Setting out the method in which transfers will take place will not only provide clarity but will protect existing shareholders. This is particularly useful where a shareholder has died/left and you are now considering how to transfer the outgoing shareholders' shares.

Statutory pre-emption rights (ss.561-576 CA) require prioritisation of existing shareholders over prospective shareholders pro-rata to their shareholding, exclusively with allotment of shares. With no mention of such pre-emption rights on transfer/transmission events, it is important that you include this within a shareholders' agreement to attentively protect existing shareholders, by controlling and restricting the transfer of shares.

OTHER AREAS TO MENTION:

How disputes will be solved;
What will happen if there is a deadlock at director & shareholder level; and
How the company intends to deal with future finances.

Please do not hesitate to contact us if you have any queries or intend to draft, review or amend a shareholders' agreement: our team is at hands to help you make the right decisions.