Do I Need A Shareholders’ Agreement?

When you are busy trying to make your company a success putting a Shareholders’ Agreement into place is sometimes overlooked or not considered important. A Shareholders’ Agreement regulates your relationship with the other shareholders.  When everyone is positive and things are fresh and going well, it is often hard to envisage the day you may not all be in agreement or that one of you may want to withdraw and sell your shares. However, things do change and disputes do arise.

What is a Shareholders’ Agreement and why should one be put in place?

A Shareholders’ Agreement governs the relationship between the shareholders of a company and will provide a clear framework within which the company is to be run and detail exit routes for shareholders.  Taking the time to get the Shareholders’ Agreement in place means disputes can be dealt with in a manner which avoids time consuming, disruptive and expensive litigation.

The need for a Shareholders’ Agreement is even greater if there are an even number of shareholders each with equal rights (i.e. two shareholders each holding 50% of the issued shares) because a “deadlock” could occur 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.  The agreement should therefore provide procedures to follow in the event of a deadlock situation.

If a shareholder holds less than 50% of the voting shares of the company, they will be a minority shareholder.  Without protection from specific clauses in the company’s Articles of Association or a Shareholders’ Agreement, shareholders holding 75% or more of the shares will have almost complete control of the company and the board of directors.  The Companies Act 2006 provides limited protection to minority shareholders whose position has been prejudiced, but this involves recourse to the courts and can be both expensive and uncertain.

What are the key differences between Articles of Association and a Shareholders’ Agreement?

Firstly, Articles of Association
  • These have to be filed at Companies House and are on the public record;
  • Governed by company law and binding on all members of the company;
  • Can be changed by a resolution requiring approval from 75% of the shareholder;
  • Personal rights and restrictive covenants are not valid if contained in the articles.
Secondly, Shareholders’ Agreement

  • Private and confidential document that does not have to be publicly disclosed;
  • It is an agreement between the members of a private limited company who have signed up to it and is governed by contract law;
  • Can be easily altered and terminated by agreement without the obligation to comply with the formalities of the Companies Act 2006;
  • Personal rights are binging on all parties to the agreement.

What can normally be found in a Shareholders’ Agreement?

Shareholders’ Agreement are flexible and it will be bespoke to the requirements of the company and its members. However, the following provisions are typically found in a Shareholders’ Agreement:-

  • Restrictions on the transfer of shares;
  • Mechanism for calculating the value of the shares if they are sold;
  • Provisions regulating the resolution of disputes;
  • Management issues such as who can appoint and remove directors, how decisions will be made;
  • Minority Protection Provisions which will include a list of items which cannot be changed (e.g. company name, type of business or limit on borrowing) without the written consent of all or a specific percentage of the shareholders.  These prevent the minority from being excluded from the management and decision-making process of the company, ensure that they receive sufficient information about the company and prevent any interference with their rights;
  • Restrictive covenants and confidentiality provisions for existing and exiting shareholders.

Is there anything else to be considered?

The company should consider taking out insurance policies on the lives of each shareholder which will provide the surviving shareholders or the company with the funds to buy a deceased shareholders’ shares.

In the majority of cases especially with smaller companies the shareholders are also the directors of the company. It is important not to ‘confuse shareholder issues with management issues which are dealt with by the board of directors.  Therefore, in addition to a Shareholders’ Agreement, directors’ service contracts should also be put in place.

If a new shareholder is joining the company, they will need sign a document by which they agree to become a party to the Shareholders’ Agreement. This is referred to as a deed of adherence.

To conclude

As you can see it is important to put a Shareholders’ Agreement into place. The best time to do it is early on when all parties are positive and getting along. You may not always get on with your fellow shareholders’ and having a clear set of documents in place will assist if things go wrong or simply if circumstances change.

For a no obligation free initial chat please do not hesitate to get in touch with Eliot Hibbert, Managing Director of Nexa Law eliot.hibbert@nexa.law 03300 24 24 20.

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