Shareholders’ Agreements

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4 binders stacked full of papers

A shareholders’ agreement is a contract made between the shareholders of a company to govern the relationship between them, set out rules to deal with disputes and to establish a framework on how the company should be operated.

Do I need one?

Nobody likes to consider the worst case scenarios when setting up a company; it is usually a time of excitement and positivity. Often when companies are set up between friends, family members or long-term business partners, the inherent trust makes it is easy to ignore such possibilities.

In the event of disagreement or dispute though, a well-drafted shareholders’ agreement can be priceless to ensure protection and continuity of business.

They can also document each shareholders’ rights and obligations, govern how important company decisions are to be made and regulate the transfer of shares.

Often by the time a shareholders’ agreement is needed in practice, it is too late. So preparation is key.

Do the Articles of Association do the same job?

Whilst articles of association and general company law assist to some extent, a shareholders’ agreement will give a much-needed framework to effectively operate the company within agreed parameters. They will also help to guide the company and shareholders through periods of uncertainty, and to avoid the need for expensive and upsetting litigation.

Where do I start?

The following are key topics to consider in relation to a shareholders’ agreement:

1. Consent matters – company law provides for most shareholder decisions to be taken by a simple majority (>50%), with some key decisions, such as changing a company’s name or articles, requiring at least 75% approval. A shareholders’ agreement can give greater control here and people often specify a wider range of key business decision for the shareholders to approve.

2. Share transfers – if a shareholder wants to sell their shares, should existing shareholders have a right of first refusal? When a shareholder who is also an employee or director resigns, what should happen to their shares? What happens if a shareholder dies? These matters can all be dealt with under a shareholders’ agreement.

3. Directors and information – consider whether shareholders have the right be on the board? Frequency of board meetings can be set and a shareholders agreement can prescribe what rights shareholders have to information, including management accounts, business plans, budgets etc.

4. Dispute resolution – what happens if there is a deadlock between shareholders? What steps can be taken to resolve a dispute and ensure the company is not constrained from making decisions and operating its business?

5. Restrictive covenants – having been privy to the Company’s valuable and confidential information, should shareholders be prevented from competing with the business after they cease to be a shareholder?

6. Dividends – when should dividends be paid and what percentage of profits should be distributed.

Our Corporate Team can advise you how best to tackle these issues with your objectives in mind and offer fixed fees for shareholders’ agreements.