Focus on Shareholders’ Agreements

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When incorporating a company, it is easy to overlook the possible need for a shareholders’ agreement. A shareholders’ agreement can be a crucial tool to the success and smooth operation of a company.

What is a shareholders’ agreement?

The principal purpose of a shareholders’ agreement is the regulation of the relationship between the shareholders of a company. It will usually provide a framework (whether detailed or otherwise) within which the company is to be operated and (amongst other things) put in place mechanisms whereby shareholder-related disputes can generally be dealt with in a way which avoids potentially costly litigation.

There is no such thing as a ‘standard form’ shareholders’ agreement, as the content of such an agreement very much depends upon the nature of the company’s business, the number and type of shareholders involved and the manner in which the company’s share capital is divided amongst its shareholders. For example, a shareholders’ agreement for a company with three shareholders with equal shareholdings will read very differently to a shareholders’ agreement for a company with 10 shareholders, one of whom owns a majority of the shares in the company. Shareholders’ agreements can, amongst other types of arrangement, be put in place for joint venture companies (where two shareholders pool their capabilities and resources for a common purpose), family companies (where the shares are owned by various members of the same family) and companies which have been the subject of third party equity investment (where an investor has injected capital in return for a shareholding).

What provisions are normally incorporated into a shareholders’ agreement?

As mentioned above, there is no such thing as a ‘standard form’ shareholders’ agreement.Despite this, there are certain matters which are catered for in most well-drafted shareholders’ agreements.These include as follows:

  • Nature of the business and any objects.
  • Funding requirements (both initial and ongoing) and party contributions.
  • Board composition and management arrangements.
  • Distribution policy.
  • Transferability of shares in different circumstances (including drag and tag along rights and compulsory transfer events).
  • Prospect of additional shareholders.
  • Minority protection (for example, veto rights on certain matters).
  • Restrictive covenants.
  • Confidentiality.
  • Deadlock resolution.

Shareholders’ agreement vs. articles of association

There is continual debate about the types of provisions which should be incorporated into shareholders’ agreements and which should be incorporated into articles of association. There are however important differences between the two which should be considered at the outset:

  • A shareholders’ agreement can cater for almost any bespoke arrangement. However, articles of association must comply with the well-established body of law that governs how companies must be run.
  • A shareholders’ agreement is a contract between a company’s shareholders (and, sometimes, the company itself) and can deal with all aspects of the parties’ relationships, including personal rights and obligations. However, articles of association generally only take effect as a contract between shareholders in their capacity as members and so cannot deal with matters which are personal to the shareholders if this fetters the company’s statutory powers.
  • A shareholders’ agreement can usually only be amended by the agreement of all parties to the agreement. Articles of association can generally be altered by special resolution, unless they contain entrenched provisions (broadly, provisions to the effect that specified aspects of the articles of association may only be amended if certain conditions are met, or procedures are complied with, which are more restrictive than those applicable in the case of a special resolution).
  • New shareholders of a company are not automatically bound by any pre-existing shareholders’ agreement and they will generally be required to execute a deed whereby they adhere to the terms of the agreement. However, new shareholders of a company are automatically bound by the company’s articles of association when they acquire shares in the company.
  • If carefully constructed, there is no specific need to register a shareholders’ agreement (or any changes to it) at Companies House. The contents of a shareholders’ agreement therefore remains private as between the parties. However, articles of association (and any changes to them) must be registered with Companies House and are a public document.

As mentioned above, a shareholders’ agreement can be a crucial tool to the success of a company and the shareholders of a company would be well advised to consider entering into such an agreement. However, time should be taken by a company’s shareholders to carefully consider the contents of a shareholders’ agreement and consider the manner in which it might interact with the company’s articles of association. The involvement of a solicitor in this process comes highly recommended.

If you would like to discuss any of the topics within this blog please get in touch.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.