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Shareholders Agreements

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Shareholders Agreements

Shareholders Agreements are contracts between the shareholders of a company and whilst there is no legal requirement to have a formal shareholders agreement in place when you first set up a company and issue shares, they are recommended.

What is The Purpose of a Shareholders Agreement?

The purpose of a shareholders agreement is to protect both the company and the shareholders, document the relationship between the shareholders and detail how the company will be run.

Shareholders Agreements will:

  • Set out the shareholders rights and obligations
  • Regulate the sale of shares on the company
  • Describe how the company is going to be run
  • Provide an element of protection for minority shareholders and the company
  • Define how important decisions are to be made

Shareholders agreements protect minority shareholders against majority shareholders using their voting power to make all the decisions. The agreement can specify decisions that require some or all of the shareholders to agree.

What Should They Include?

There are ten important points that should be considered to include in a shareholders agreement:

  1. The appointment and removal of directors
  2. The issuance, transferral and ownership  of shares
  3. Remuneration and dividend entitlement for both shareholders and employees
  4. Conditions relating to the disposal of shares and any pre-emption rights
  5. Rules relating to bank borrowing, raising capital and strategic capital expenditure
  6. Terms to protect minority shareholders providing for unanimous shareholder approval is required for certain company decisions
  7. Restrictions on making changes in respect of what the business does, and agreement around future acquisitions
  8. Disclosure of any conflicts of interest, including restrictions on involvement with competing businesses
  9. Dispute resolution procedure for shareholders
  10. Confidentiality provisions as unlike articles of association, a shareholders agreement does not have to be submitted to Companies House for public access

The shareholders of a company might decide that shareholders who are also employees will need to earn their shares. Where this is the case, the agreement will also need to cover what happens if that employee resigns, will they retain shares earned to date, will the shares automatically be purchased by the remaining shareholders and will these be sold at market value?