Do I need a Shareholders' Agreement?

If you are a shareholder of a private limited company limited by shares along with other shareholders, whether as a majority, equal or minority shareholder, it is important at an early stage to consider protecting your position and ensuring the company is run as intended when business relations are generally at its best between shareholders.

For example, if you are a majority or original shareholder you may wish to ensure control and ownership of the company remains with you and your family by requiring any proposed share transfer from the minority shareholder(s) to be approved by you, or offered to you in first instance.

Alternatively, if you are a minority shareholder you may wish to ensure those important matters which may not need your consent under the company’s articles of association or the Companies Act require your approval before being actioned, and ensuring the majority shareholder(s) do not transfer their shareholding to an undesired third party unknown to you.

Whilst having a shareholders' agreement is not a statutory requirement, it is an important legal document for shareholders to be able to reply upon where business relationships deteriorate over time, and to clearly set out the shareholders’ intentions as to how the company should be run in the future, including if a shareholder wishes to exit the company or in the event of a shareholder’s death. Without it the shareholders will have to carry on the business of the company in accordance with its articles of association, which if not drafted to the company’s bespoke requirements, may not reflect the shareholders’ intentions.

What is a Shareholders’ Agreement?

A shareholders’ agreement is an agreement which is entered into by the shareholders of a company (and sometimes the company itself) and seeks to regulate the relationship between the shareholders and clarify certain matters relating to the company and its business. 

Whilst a company’s articles of association needs to be filed at Companies House, meaning they are available to view online by the public, a shareholders’ agreement does not. Therefore shareholders may prefer to have their respective rights and obligations set out in a private agreement.

Common provisions within a Shareholders’ Agreement

Although the shareholders’ agreement is a bespoke agreement tailored to the shareholders’ and company’s requirements, important provisions often included in such an agreement are as follows:

• Company’s Business: A clause setting out the type of business which the company is to operate in.
• Transfer of shares: A clause setting out what happens in the event that a shareholder wishes to exit and transfer their shares, and whether or not such shares are to be offered to existing shareholders first (ie. a right of first refusal).  The agreement may also set out permitted transfers where prior written consent from the continuing shareholders is not required (for example to family members), and also compulsory transfer events whereby a shareholder is compelled to transfer their shares to the other shareholders in certain circumstances (for example on death or upon leaving employment or their office as a director).
• Shareholder death: Confirmation as to whether the surviving shareholders will have the option to acquire a deceased shareholder’s shares in the event of death, including obligations to put in place appropriate life assurance policies to ensure such transfers can be funded at the time of death. If no such provisions are in place, a shareholder’s shares will pass to their intended beneficiaries under their Will or under intestacy rules.
• Matters requiring consent: Significant decisions of the company whereby the shareholders agree these should only be taken with the prior written consent of either a specified percentage of the shareholders (whether by reference to the number of shareholders or their shareholding) or unanimous consent. Examples of such decisions to protect the minority shareholders may include varying the company's articles of association; altering the share capital and rights associated with the shares; and changing the nature of its business.
• Deadlock: Provisions setting out how a deadlock is to be resolved, which usually consists of a process whereby a shareholder will transfer their shares in the company to allow the company to move forward and continue. This is particularly important where there are shareholders with an equal shareholding.
• Restrictive covenants: A clause which restricts a shareholder, during the period when they are a shareholder and also a specified period after they cease to be a shareholder, from competing with the company or enticing away any of its customers, suppliers or employees. It is important to appreciate the enforceability of any such restrictions is not guaranteed, so careful consideration must be given as to the length of time, and the territory within which, such restrictions are to apply to, to increase the likelihood of such provisions being deemed enforceable if ever challenged.

If you would like a shareholders’ agreement prepared for your company, or would like us to review a shareholders’ agreement you have received before entering into it, then please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on scott.richardson@glanvilles.co.uk.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.

If you require further legal advice, please contact one of our experienced solicitors by emailing hello@glanvilles.co.uk who would be happy to assist.  

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.