What is a shareholder agreement?
A Shareholders’ Agreement is a legally binding contract between shareholders, being the owners, of a private limited company. It governs the relationship between the shareholders, sets out their rights, responsibilities and obligations and provides a framework as to how the Company will be managed at shareholder level.
The Purpose of a Shareholders Agreement
As referred to above, a Shareholders Agreement can be fundamental in helping to clarify the roles of each shareholder. It may outline their voting rights over various decisions the company may take, their responsibilities in day-to-day operations and their expectations for decision making. Combined with a Business Plan, this could ensure the healthy growth of a company and mitigate any potential conflict between shareholders.
Establishing, growing and running a company can be difficult though and create tension and disputes between shareholders. A Shareholders Agreement can be used to establish how a shareholder can exit the company and what happens in case of a relationship breakdown as well as other possibilities such as the death, retirement or incapacity of a shareholder.
Finally, a Shareholders Agreement may protect a minority shareholder, that is a shareholder who holds a minority share of the company. By outlining their rights, it ensures they are treated fairly and not overruled by majority shareholders.
Key Provisions of a Shareholders Agreement
A Shareholders Agreement may specify the share capital and ownership structure of the company. It could outline the number and type of shares issues to each shareholder, what rights are attached to those shares in terms of voting, rights to dividends and rights to capital. Equally, this information may be more appropriate in a bespoke set of articles of association.
Below are more provisions you would typically expect to see in a well drafted Shareholders Agreement:
Decision Making
A Shareholders Agreement may define the decision-making process for major company decisions that require shareholder input. It could specify the threshold for passing certain decisions and whether additional consent is required.
Dividend Policies
Sometimes it may not be appropriate to have a dividend policy to provide shareholders and directors flexibility when declaring and approving dividends. However, in some cases, it could be beneficial to outline how dividends are declared and paid to shareholders and when.
Transfer of Shares
Provisions around transferring shares are common in a Shareholders Agreement to ensure that control is maintained by the current shareholders. These could include:
- Pre-emption rights: These grant the remaining shareholders a right of first refusal before shares are transferred to a third party.
- Tag along and Drag Along Rights: These provisions affect minority shareholders by allowing them to join in a sale if the majority shareholders decide to act or allows the majority shareholders to force the sale of the minority shareholders shares.
- Compulsory Transfers: There may be a list of events which trigger a compulsory transfer of a shareholders shares to the remaining shareholders such as their bankruptcy, retirement, incapacity or death.
Exit Mechanisms
Together with compulsory transfer provisions, the agreement may include other exit provisions which ensure a fair valuation of their shares or provide for a process and method in which they can be bought out.
Restrictions on the Parties
To protect the company’s interests, shareholders may agree to non-compete clauses which affect them while they are a shareholder and for a certain amount of time after ceasing to be a shareholder. They may prevent departing shareholders from starting or investing in a competing the business, or taking staff, customers or suppliers which belong to the company.
Conclusion
Although a well drafted Shareholders Agreement can appear complex and costly, it can be vital for protecting the interests of shareholders, ensuring the smooth operation of the company and managing potential conflicts and disputes. Shareholders should always consult legal experts if thinking of creating a Shareholders Agreement to ensure, like all contracts, it is clear and enforceable, and tailored to the specific needs of the business and its owners.
For more details on how we can support you or your business, contact our Corporate and Commercial Law team today.
Client Case Study
Selling a company after 38 years
and why we chose HSR Law.
Client Case Study
The share-sale of a company
to an American buyer.
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