Running a private limited company with people you trust can be great and it is hard to imagine a day where things might go wrong. However, once a conflict does occur, that trust can quickly disintegrate and shareholders will need to be able to deal with that conflict quickly if (or when) it does happen. A shareholders’ agreement can help avoid a lengthy and expensive litigation process by providing a mechanism that enables disputes to be resolved as quickly and efficiently as possible.
Often a company’s articles of association would provide only limited rules for shareholders and directors, so it is wise to have a separate legal agreement to regulate the relationship between shareholders. A shareholders’ agreement can go much further and can set out more extensive rights and restrictions on the parties. It will normally, among other things, provide a framework within which the company is to be run, and also details exit strategies for shareholders.
The benefits of a shareholders’ agreement
A shareholders’ agreement is entered into between all, or some, of the shareholders in a company. It can help to
- regulate decision making
- provide dispute resolution procedures
- offer protection for minority shareholders
- set out the rules on transferring shares or appointing directors.
It can provide a layer of comfort to shareholders and may be updated, amended or re-written, if major changes take place within the company. If you take on a new shareholder, then they may be required to sign a deed of adherence to ensure that they are bound by the terms, meaning you won’t need a new agreement each time.
It is also worth bearing in mind that, if you have a company that is likely to seek further investment in the future, any investor will want to see that your business is properly run. A well drafted shareholders’ agreement is a strong indicator that a company is in good order and that it takes protection of shareholder rights seriously.
Shareholders’ agreements vs. articles of association
A key benefit of setting out such rights and restrictions in a shareholders’ agreement, rather than in a company’s articles of association, is that it keeps the terms of your arrangement private. A company’s articles of association must be filed at Companies House and is therefore a public document. A shareholders’ agreement on the other hand, is a private document and its terms can remain confidential.
How Debenhams Ottaway can help you
Our experienced corporate lawyers regularly help shareholders draft bespoke shareholders’ agreements as well as tailored articles of association. We take the time to listen to your specific concerns and can provide you with a clear explanation of all options available to you. We work with a range of businesses, from small companies requiring agreements for only two or three shareholders, to medium/larger sized private limited companies with numerous shareholders. Shareholders’ agreements may be as simple or as complex as required; our lawyers are guided by you and your interests.
If you have a dispute between directors or shareholders, whether or not a shareholders’ agreement exists, we can advise you of your rights and, working with our dispute resolution team, help you take action or resolve the dispute.
If you need any help with setting up a shareholders’ agreement, please get in contact with someone in our corporate and commercial team.
Here are some frequently asked questions on shareholders’ agreement.
Ideally, shareholders will enter into an agreement on incorporation of a company, where there is more than one shareholder. However, there is never a wrong time to think about the future of your business, so if you are already in business with others, and do not have an shareholders’ agreement in place, we strongly recommend that you get one. As well as helping you regulate how your business is run, and providing a mechanism for shareholders to exit the company, it will also safeguard your position in the event of a dispute and detail how it should be resolved. It also gives you the benefit of contractual remedies, such as damages, if any of the other parties break the terms of the agreement.
All shareholders’ agreements are bespoke to the company in question, however they would typically include provisions setting out or covering:
- the financing and management of the company
- a dividend policy
- restrictions on the transfer of shares
- deadlock situations
- a mechanism for the valuation of shares if they are sold
- protections for minority shareholders and restrictive covenants
- confidentiality provisions for both existing and departing shareholders.
Yes. Once signed, a shareholders’ agreement is a legally binding contract on all the parties to it.
A shareholders’ agreement can generally only be amended by the agreement of all the parties to it, whatever the size of their shareholding. A deed of variation, or an entirely new agreement, may need to be drawn up and signed by all shareholders or partners to reflect the revised terms.
Shareholders’ agreements typically provide exit strategies for shareholders. This can be particularly important if a shareholder is also an employee of the company as the agreement can provide for a different valuation method of the shares depending on the circumstances of that employee’s departure. Whatever the scenario, having a shareholders’ agreement in place prior to any shareholder wanting or needing to exit the company will enable a far smoother transition. It is also possible to include restrictive covenants for the exiting shareholder which can help to protect the business and remaining shareholders.
The Companies Act 2006 does provide shareholders with a mechanism to remove a director provided they follow a very specific process. At a general meeting, an ordinary resolution would need to be passed, the shareholders having previously given the company special notice of their intention to propose that resolution. It is important to check the articles of association of the company and the provisions of any existing shareholders’ agreement, as these documents can also both set out procedures for the removal of a director. You should always get professional legal advice when removing a director.
A shareholder who owns less than 50% of the company is called a minority shareholder, and unless there are specific provisions in a shareholders’ agreement or in the articles of association, they will have extremely limited rights. The only way to enhance these rights is via the articles of association or a shareholders’ agreement and there is no limit to the extent of enhancement possible for these rights over and above what is set out in the Companies Act. A list of reserved matters in a shareholders’ agreement is a good way of ensuring that big decisions are voted on by all shareholders no matter what the size of their shareholding.
It is important to have a shareholders’ agreement if there is an even number of shareholders, all with equal rights attached to their shares. The agreement can provide a procedure to follow in such a deadlock scenario (i.e., a position where the shareholders cannot agree on the best way forward and there is not a sufficient majority to pass a resolution). A dispute resolution procedure can also help to keep the business moving forward, whilst protecting shareholders’ interests.
A shareholders’ agreement will usually contain provisions on what happens to an individual’s shares upon their death, or in the case of a corporate shareholder upon its liquidation or insolvency. The agreement may also contain restrictions on the lifetime transfer of shares. Pre-emption rights are often included which require a shareholder to offer their shares to the remaining shareholders before they can offer them to a third party.
Yes. A provision in a valid and binding shareholders’ agreement, to which a deceased shareholder is a party, will take precedence over a conflicting provision in the deceased’s Will. The shareholders’ agreement will bind the personal representatives of the deceased, who will effectively “step into the shoes” of the deceased shareholder.
It is difficult to give a blanket guide for the cost of a shareholders’ agreement as it will depend on the circumstances, number of shareholders, number and rights of share classes and the issues the parties want the agreement to cover.