Attila Hunter of our Corporate and Commercial department sets out the reasons why shareholders in a business should consider putting a shareholder's agreement in place and how it may help the running of the business.
Attila Hunter of our Corporate and Commercial department sets out the reasons why shareholders in a business should consider putting a shareholder's agreement in place and how it may help the running of the business.
What is a shareholders' agreement?
A shareholders' agreement is a private agreement made between the shareholders of a company. Its purpose is to govern how the company is run, protect shareholder investments and establish the relationship between the shareholders. The agreement can be entered into by individuals, corporate bodies or a combination of the two. Essentially any group of shareholders can enter into a shareholders' agreement providing its terms are agreed between the parties.
When may a shareholder's agreement be useful?
A shareholders' agreement may be useful for two or more individuals who have an equal shareholding in a company and wish to set out the decision making process in the event there is a deadlock in shareholder decisions. A shareholders' agreement may also be useful when two or more individuals have an unequal shareholding in a company and wish to introduce majority or minority protection rights. Shareholders may also look to enter into a shareholders' agreement when they are setting up a joint venture and wish to stipulate each company's obligations in a binding document.
What you may find in a shareholders' agreement?
A shareholders' agreement is a private document and can therefore contain such clauses as the parties may agree. Typical provisions that would usually be found in a shareholders' agreement include;
Object and scope – this is useful to ensure that all parties agree on what the company or joint venture has been set up to achieve and provides something for shareholders to point to in the event the company or joint venture appears to be heading in a different directions as what was originally agreed.
Dividend policy – this sets out the dividends that should be paid to shareholders. Dividends can only be paid from a company's clear profits and the value attributable to them is usually decided by the company directors. However, a shareholders' agreement may contain a clause which states that a minimum percentage of the company's clear profits is to be paid to the shareholders by way of dividend. This can protect minority shareholders and also ensures that those who have purchased shares as an investment will see a return on their investment.
Transfer of shares – a shareholders' agreement usually contains the procedure for transferring shares and may include "drag along" provisions. This is useful when a third party wishes to purchase a company as it would allow a majority shareholder to force the other shareholders to sell their shares on the same terms. Similarly, a shareholders' agreement may contain "tag along" provisions, this allows minority shareholders to ensure that their shares will also be purchased if the majority shares are being sold. A shareholders' agreement may also set out what will happen to shares upon the death of the shareholders.
Restrictions – parties may wish to include certain restrictions on the shareholders such as non-compete, non-solicitation and no poaching provisions. These usually apply during the time that the parties are shareholders and for a reasonable period thereafter.
Shareholder consent – a shareholders' agreement may list matters which require consent of all or some of the shareholders in order to impose on the management of the company. This list usually covers the more important corporate decisions such as borrowing money over a specified amount or changing the company's name.
Can incoming shareholders be bound to the terms of an existing shareholders' agreement?
Although not automatic, a company can bind incoming shareholders to the terms of the shareholders' agreement by making it a condition for any incoming shareholders to execute deeds of adherence to the agreement. However the practicality of this should be considered if the identity of the shareholders is likely to change frequently.
What are the benefits of having a shareholders' agreement?
Similar to articles of association, a shareholders' agreement sets out how a company should be governed. There are, however, some benefits of using a shareholders' agreement rather than amending a company's articles to dictate how a company is run;
Whereas articles are filed at Companies House and can be viewed publicly by anyone, a shareholders' agreement is a private document which is confidential between the shareholders and usually kept at the company's registered office. This is beneficial for companies who wish for certain information to remain confidential such as the contributions of the shareholders.
Usually articles are generic and contain standard rules that a company should comply with. A shareholders' agreement is useful for when a company or joint venture has bespoke provisions in place and wishes to set out the day to day operations such as how the company or joint venture is to be managed and how to deal with disputes between the parties.
Articles can generally be amended by special resolution (majority of at least 75% of shareholders) however a shareholder's agreement usually requires agreement of all the parties in order to be amended. This provides protection for all shareholders including those with a minority shareholding.
Aside from the above, a further benefit of having a shareholders' agreement is that it can be used to act as a master agreement for the completion of secondary documents between the parties such as; a management agreement between two companies in a joint venture, or a scope of works contract between two developers who have joined forces on a development project.
People often set up companies with friends or family and do not consider the chance of things going wrong. The benefit of having a shareholders' agreement is that it will include provisions that pre-empt disagreements and set out how these should be resolved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
