Shareholders’ Agreements : The Importance of a Well Designed Document

Q: WHAT IS A SHAREHOLDERS’ AGREEMENT?

A shareholders’ agreement is a contract entered into between a company and some or all of its shareholders. The purpose of such an agreement is to govern the relationship between the parties including personal rights and obligations of shareholders. Together with the articles of association of the company, the two contracts create internal rules by which the company, and shareholders have to abide by.

Q: WHY WOULD MY COMPANY NEED A SHAREHOLDERS’ AGREEMENT?

It is prudent to put a shareholders’ agreement in place from the outset, i.e. as soon as the company has been incorporated or has started to trade, as it is easier for the parties to agree and focus on such matters at this stage when they have the time as opposed to when the business is up and running. The whole point of the agreement is to avoid disputes in the future and should they arise the agreement would determine how such dispute is to be resolved. This is much quicker and easier option than trying to negotiate a settlement on the occurrence of dispute.

Q: WHAT WOULD A SHAREHOLDERS’ AGREEMENT TYPICALLY INCLUDE?

Typically a shareholders’ agreement would commonly address the following 4 important matters:

1. Management: directors of a company are responsible for day to day decision making and management of the business, and accordingly are entitled to exercise all powers of the company as necessary for it to function without shareholders’ consent. In some companies, where the director is also a shareholder, this is not such an issue, however where the shareholder is not a director then he or she would most certainly wish to be consulted on or reserve the right to be able to veto fundamental decisions, i.e.selling material assets of the business and appointing new directors.

2. Dividend: each shareholder may have different ideas as opposed to when dividends will be paid by the company. Some shareholders, may wish the company to retain the equity to enable it to grow, whereas others may have envisaged a swift return. The agreement would stipulate as and when dividends can be declared i.e. after a period of 3 years, and / or after all the loans have been repaid.

3. Voluntary transfer of shares: Should any shareholder decide to sell his or her shares, naturally the other shareholders would want to be consulted on this, as they would not want a competitor to purchase the shares or a third party who has a differing view on how the business should be operated. The shareholders agreement would oblige the selling shareholder to obtain the consent of the other shareholders’ and/ or offer the shares for sale to the existing shareholders first, before selling them to a third party.

4. Compulsory transfer of shares: Should a shareholder decide to leave the company, as a director, the remaining shareholders, may not wish for him or her to retain shares in the company. In order to circumvent this, compulsory share transfer provision can be incorporated into the agreement, so that a departing director, who is also a shareholder, would be obliged to sell his shares to the remaining shareholders or company.

Q: WHAT OTHER CLAUSES WOULD A SHAREHOLDERS’ AGREEMENT TYPICALLY INCLUDE?

There are no hard and fast rules about what the agreement should or should not contain. The agreement can cover any matter that the shareholders’ wish to address. Other common provisions include deadlock, drag along and tag along on the sale of the company, and non-compete restrictions on shareholders. Overall a shareholders’ agreement is fundamental to the functioning of a successful business and governance of internal rules as it resolves any ambiguity over present and future management of the business. It also has a deterrent effect, as having one in place from the outset not only resolves disputes, but deters any hostile shareholder from creating any frivolous claim or dispute.

For further information on hareholders’ agreements or any other corporate law matter please contact one of our corporate or commercial solicitors in West London on 01895 207271 or email corporate@ibblaw.co.uk. Alternatively please visit https://www.ibblaw.co.uk/service/corporate-and-commercial

For further information please visit the respective pages:

Business Structures and Joint Ventures. https://www.ibblaw.co.uk/service/corporate-and-commercial/business-struct…

Acquisitions, Mergers and Disposalshttps://www.ibblaw.co.uk/service/corporate-and-commercial/acquisitions-me…

Corporate Restructuring and Insolvency Solicitorshttps://www.ibblaw.co.uk/service/corporate-and-commercial/corporate-restr…