Shareholders agreement: when should I get them?

When plans are being made to form a jointly owned company, a shareholder’s agreement will be vital to its establishment, operation and success. This document regulates the behaviour of the shareholders towards each other and the company, as well as procedures to follow in the event of shareholder disputes and the winding up of the company.

Why is it Important?

Anyone to whom shares will be transferred should be required to sign a shareholder’s agreement before any shares change hands. Whilst a company’s Articles of Association deal with the rights and obligations of the company itself, the shareholder’s agreement allows the individual shareholders to set out their rights against each other (e.g. in relation to voting and dividends). This gives the shareholders a greater level of control when it comes to the day-to-day management of the company.

What it is / what should be included?

A standard shareholder’s agreement envisages business partners starting a joint venture with equal shares via a private limited company. The bullet points set out below will need to be agreed upon in principle before the agreement itself is drafted. Where the agreement is more complex than the standard arrangement (e.g. because it involves unequal stakes in the company), several variations and additions to these issues may need to be contemplated.
  • Who are the investors, how many shares (and what type) are they purchasing, and for how much?
  • How does the issue, transfer and valuation of shares work? There is usually a ban on transferring shares without the consent of the other shareholders.
  • Shareholders also generally have the option to buy new shares which are being sold by the company, before they are offered to the general public (otherwise known as first refusal rights).
  • What is the procedure for shareholder meetings? Do shares carry one vote each? Consideration will need to be given to who has the right to convene meetings, how often the meetings are held and how many shareholders must be present each time. Traditionally, companies were legally obliged to gather the company directors and shareholders and hold an Annual General Meeting each year (to discuss the business of the company), but this is no longer the case.
  • What role do the shareholders play in the management of the company? Will they decide the size of company investments, levels of executive pay and so forth?
  • What is the course of action for payment of dividends? Often a particular percentage of the company’s annual profits available for distribution will be paid out as dividends.
  • Are there certain matters which the shareholders must unanimously agree upon before any action is taken in the name of the company?
  • If any loan has been provided to the company (e.g. by a bank or a director), what terms have been agreed?
  • Will provisions be necessary to protect the confidentiality of certain information? Such provisions typically include restrictions on the use and sharing of such information. In view of the sensitive company information that shareholders will be privy to, this is very likely to be necessary.
  • What are the circumstances in which the agreement terminates? These might include the sale or bankruptcy of the company.
  • Are non-competition and non-solicitation clauses required after a party no longer holds shares in the company? If so, any time periods for the duration of these restrictions must be reasonable.
  • What are the matters to be dealt with on wind up of the company? As a minimum, the shareholders should be obliged to cooperate with one another and provision should be made for whether the investors can acquire the business or any of its assets.
  • What happens if there is a conflict between the company’s Articles of Association and the terms of the shareholder’s agreement? This should be avoided but the agreement will usually state that its terms take precedence over any conflict with the Articles.
Unlike a company’s Articles of Association, the shareholder’s agreement is not a public document that must be registered at Companies House.

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