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Shareholder Agreements

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. 

Is a Shareholders’ Agreement needed, and if not, why have one?

Having a shareholders' agreement in place is not a statutory requirement. Therefore as shareholders are not legally required to have a shareholders’ agreement in place, and often get along well at the start of their business relationship, preparing a shareholders’ agreement is often overlooked.

Unfortunately the reality is that in some cases the shareholders in a company fall out with each other and business relationships deteriorate over time. This is where the shareholders’ agreement is important. By having a shareholders' agreement in place with appropriate dispute resolution and/or exit provisions included, disputes between shareholders can be settled promptly before they become detrimental to the company's business.

Without a shareholders’ agreement in place, 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.

In addition, whilst a company’s articles of association need to be filed at Companies House, meaning they are available to view online by the public, a shareholders’ agreement does not and is a private contractual arrangement between the shareholders (and sometimes the company itself). Therefore shareholders may prefer to have their respective rights and obligations set out in a private agreement.   

What to include in a Shareholders’ Agreement?

A shareholders’ agreement should be a bespoke agreement tailored to the shareholders and company’s requirements. Therefore a shareholders’ agreement for one company is unlikely to be suitable for another.

Whilst the shareholders’ agreement is a bespoke agreement, important provisions often included in such an agreement are as follows:

  • Business: A clause setting out the type of business which the company is to operate in.
  • Matters requiring consent: Decisions of the company which are of significant importance 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. This provision is important to protect the minority shareholder(s) and examples of such decisions 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.
  • Transfer of shares: A clause setting out what happens in the event that a shareholder wishes to 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 compulsory transfer events whereby a shareholder is compelled to transfer their shares to the other shareholders, for example on death or upon leaving employment or their office as a director.
  • 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 two 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.