What is a Shareholders’ Agreement?
It is common for shareholders of a company to enter into a written agreement with one another which will govern how they will behave in relation to their company. This is known as a Shareholders’ Agreement. The company itself may or may not be a party to this agreement.
It is not compulsory for the shareholders to enter a shareholders’ agreement and it is for each shareholder to enter freely into the contract if he/she decides it is in their interests to do so. Generally though, it is preferable if all shareholders enter into the agreement so that they are all bound by its terms. The importance of entering into the agreement is that it will bind all the parties to the terms and the usual remedies for breach of contract will be available if any of the parties breaches them.
A shareholders’ agreement typically sets out the shareholders’ rights and obligations, regulates the sale of shares in the company, describes how the company will be run, protect minority shareholders, and define how key decisions will be made. Some of these matters will also (or alternatively) be dealt with in the company’s articles of association. We would recommend that you enter into a shareholders’ agreement when you set up your company and issue the first shares. You will also be putting in place the company’s constitution at that time (the articles). Shareholders’ agreements and articles of association should be drafted in such a way as to complement one another ensuring they do not conflict and that between them the internal affairs of the company are regulated in such a way that is fit for purpose and reflects the wishes of the shareholders.
Below are a few examples of provisions which would be included in a typical shareholders’ agreement:
- An undertaking that the company will not amend its articles without the consent of all parties.
- Similar undertakings regarding changes in capital or share capital structure.
- Requirements on unanimity among shareholders for major decisions (i.e. the sale of the business).
- Restrictions on borrowing an offering security over the company’s assets.
- Agreements regarding further financing for the company.
- Agreement on dividend policy (i.e. sharing profit).
- Any disputes between shareholders to be referred to arbitration.
- Agreement not to compete with the company’s business.
- Agreement on treatment of intellectual property rights.
- Provisions dealing with the departure of a shareholder.
- Provisions for the resolution of deadlock decision-making.
What are the benefits?
A shareholders’ agreement can deal with matters which are personal to the shareholders. Including such personal rights in a shareholders’ agreement means that they become contractually enforceable, whereas this would not be the case if they were included in the company’s articles and reliance placed on the contract under section 33 of Companies Act 2006.
A shareholders’ agreement can provide protection for minority shareholders by reserving certain decisions, such as the ability for the company to issue further shares, which can only be made with the unanimous consent of all the shareholders.
Also, a shareholders’ agreement being a private contract does not need to be made publicly available. Contrast this with the articles of association of all companies, which must be filed at Companies House and can be read by anyone. The shareholders’ agreement therefore allows for confidentiality.
This guide is for general information only and does not constitute legal advice. If you would like to discuss anything in this article please get in touch.