What is a shareholders’ agreement?
In the case of a company where one person owns all of the shares, that person will generally also be the sole director and will be in total control of the company.
In the case of a company which has more than one shareholder, questions and issues can arise as to the respective rights of the shareholders and how the company is to be controlled and managed. A shareholders’ agreement is an agreement put in place between the shareholders to deal with these issues and questions.
When are they appropriate?
Generally, a shareholders’ agreement is appropriate and advisable in any case where a private company has more than one shareholder.
This includes:
- where a company is owned equally between two partners;
- where there is any shareholder who has a minority interest of less than half of the shares;
- where a shareholder is looking to invest in buying shares in an unlisted company; and
- family companies where members of more than one generation own shares in the company.
What are the advantages?
A shareholders’ agreement helps to provide clarity and certainty on key issues affecting how a company operates and is controlled.
If no shareholders’ agreement is put in place, matters relating to the ownership and control of the company will be determined by the application of company law and by the articles of association of the company.
The articles of association of a company form the constitution of the company. There may be some overlap between matters covered in the articles and in a shareholders’ agreement and some matters, for example relating to the issue or transfer of shares, may be covered in either or both. In some cases, particularly where a company has more than one class of shares, it may be advisable to have both bespoke articles of association and a shareholders agreement in place.
Generally, standard articles of association do not address, or adequately address, many situations or issues which can arise. This can result in uncertainty and lead to disputes which can be very difficult, expensive and acrimonious to resolve.
Putting a shareholders’ agreement in place before issues arise, avoids uncertainty and helps to pre-empt or resolve such disputes.
What do they cover?
Key issues which can usefully be covered in a shareholders’ agreement include:
- how key decisions relating to the business are to be made and specifically who has the right to be involved in approving or blocking particular decisions;
- rights to be a director of the company;
- where there are minority shareholders, ensuring an appropriate level of protection for example against dilution of their interest in the company;
- how money or profits are intended to be taken out of the business for example by means of a dividend policy;
- mechanisms for dealing with disputes, which can be very important in the case of companies where ownership of the shares is split equally and which can easily become deadlocked in the case of a dispute;
- restrictions on competing with the company;
- provisions regulating the issue of new shares; and
- provisions dealing with the transfer of shares and the sale of the company.
If you would like advice in relation to putting in place or reviewing a shareholders’ agreement, please contact a member of the corporate team.
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