When setting up a new company, it is always recommended that a shareholders’ agreement is put in place. This is a contract that details a range of issues, including the rights that shareholders will have, how shares are to be valued and how dividends will be dealt with.
One of the main advantages of having a comprehensive shareholders’ agreement in place is the reduced risk of misunderstandings and disagreements arising in the future.
What are Shareholder Agreements?
A shareholders’ agreement is a contract made between the shareholders of a company and the company. It will ensure that shareholders and directors understand the role of each type of shareholder and the rights and responsibilities they have. It can also make the company directors accountable for certain decisions and require shareholder approval for specified matters, such as taking on loans and removing key personnel.
The Types of Shareholders’ Agreements
Shareholders’ agreements can be aimed at protecting minority shareholdings or majority shareholdings.
Minority Shareholdings
Minority shareholders often have little control over what happens in a company and may not be able to sell their shares. Even if a minority shareholder is also a director, they could be removed by majority shareholders unless there is a shareholders’ agreement in place giving them additional protection. Although it may be possible to object to this under the terms of the Companies Act, it is easier to have the situation clearly dealt with in a shareholders’ agreement.
Majority Shareholdings
A shareholders’ agreement that deals with majority shareholders can restrict what directors can do without approval. Clauses can be included to ensure that a majority shareholder can insist that minority shareholders sell their holding if the majority shareholder wants to sell. Without this clause, it would be much harder to sell a company, as it could be the case that not all of the shares would be available to purchase.
Key Clauses
A shareholders’ agreement should be tailored to your specific business and your needs as a director or shareholder. We can work with you to identify the clauses that you need in a shareholders’ agreement.
Clauses commonly included in a shareholders’ agreement include:
- Details of shareholders’ rights, including what issues they can vote on and what powers of veto they have
- Pre-emptive rights and rights of first refusal to buy shares
- The right to buy new shares if these are issued or the right to stop new shares from being issued
- How a deadlock will be dealt with
- How one party can buy out another’s shares
- Drag-along and tag-along provisions
- A non-compete clause stopping shareholders from involvement with rival businesses
- Good leavers and bad leavers’ clauses set out how the issue of shares will be dealt with when someone leaves
- Restrictive covenants, including confidentiality clauses
- How disputes will be resolved
Discover more on how to draft these agreements.
Advantages of Shareholders’ Agreements
The advantages of a shareholders’ agreement include:
- Reducing the likelihood of disputes
- Controlling what major decisions are taken by the company
- Regulating the sale of shares
- Protecting minority and majority shareholders
- Deadlock provisions
Disputes
Disputes can commonly arise over the running of a company and they can be disruptive and time-consuming to resolve, as well as expensive and damaging to a business and its reputation.
A shareholders’ agreement should reduce the risk of a dispute arising by ensuring that all parties understand their position and the extent of their authority. It should also include dispute resolution provisions setting out how disagreements will be dealt with, should they arise. This could include using alternative dispute resolution options such as mediation or arbitration rather than resorting to litigation. These are generally faster and more cost-effective than court action and can help those involved salvage their relationship and continue in the company together.
Approving Major Decisions
A shareholders’ agreement can also be used to require directors to seek shareholder approval for certain major decisions, such as taking on finance, incurring large items of expenditure or making changes to the governance documentation such as the articles of association. This can protect shareholders and their investments and stop directors from reducing their powers.
Regulating the Sale of Shares
How sales can be sold and transferred can be detailed in the document. This can prevent shareholders from selling to anyone they choose, for example, by giving other shareholders the right of first refusal.
Clauses should be included to deal with situations such as the death or divorce of a shareholder to prevent shares from being transferred or sold. This is not generally advantageous for a business so the agreement can include the right for existing shareholders to buy the shares in this situation.
Protecting Minority and Majority Shareholders
Drag-along and tag-along provisions can be included to protect majority and minority shareholders. If the majority shareholders want to sell, the drag-along provision will mean that minority shareholders must also sell. A tag-along provision means that if majority shareholders decide to sell, they must include the minority shareholders in the deal.
Deadlock Provisions
If a deadlock occurs, it can paralyse a company. A shareholder agreement can include deadlock provisions that set out how the situation will be dealt with. This will usually be a way in which one party can buy out the other and will include details of how the transaction is dealt with, including how the share price will be agreed upon.
Contact Our Company Law Solicitors
Having a comprehensive shareholders’ agreement in place is an essential part of having a strong legal framework for your company. We provide bespoke agreements designed to give you the reassurance and flexibility you and your business need.
If you would like to speak to one of our company law solicitors, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help.
FAQ
What happens if you don’t have a shareholders’ agreement?
Without a shareholders’ agreement, there is a risk that a company could face difficulties if a dispute were to arise. It would mean that focus and funding would need to be diverted to resolving the issue and, in the meantime, the company could suffer.
It might not be possible to sell the business without provisions requiring minority shareholders to join in and there would not be any control over the sale of shares and the actions of departing shareholders, for example, setting up competition.
Can you rely on a shareholders’ agreement in court?
A shareholders’ agreement is a legally binding contract and provided it has been clearly drafted and entered into by the usual rules of contract law, it can be relied on in court.
Why is it important to have a shareholders’ agreement?
Having a shareholders’ agreement is the best way of ensuring that all parties understand their position and that the risk of disputes is minimised.
It also allows everyone to discuss what they want to happen in certain situations. Thinking matters through beforehand can help those involved in a business consider what difficult situations might arise and how they want them dealt with, as well as what steps can be taken to reduce potential conflict.
