Bath Solicitors

What is a Shareholders’ Agreement ?

A Shareholders’ Agreement is an agreement between all or some of the shareholders of a company and regulates the running and operation of the company. The contract specifies the rights and obligations of the shareholders and the obligations and powers of management, including the board of directors.  Ideally all shareholders in the company will party to the agreement to ensure all are bound by it.

This type of agreement can be as detailed or as simple as you like.

They are generally used to decide how a company will be managed and operated. There will normally be a clause specifying who will serve on the board of directors, what tasks ought to be carried out by managements, and what happens if a director dies or retires. The maximum amount of potential compensation fees for management and the board are normally specified.

As the names suggests, the shareholders agreement is typically used by shareholders to agree on the rights they have and what other types of decisions they can make regarding shareholders. For example a minority shareholder may have no desire to be involved in the day to day decisions of the company but would want to have a say should the company wish to open up new office, hire a very expensive employee or indeed sell the company to a third party.

What are the typical types of clauses?

The typical clauses in a shareholders’ agreement might allow some of the following arrangements:

• Specify rights related to the sale, subsequent distribution or issuance of shares.
• Permit options to buy or sell shares
• Set out the duties of the directors and other management.
• Specify what will happen , and the value of shares, in case of death, retirement etc of a shareholder
• Enable existing shareholders to approve potential new shareholders
• Set out how the company will be run and what the company can and cannot do without the consent of one or more shareholders
• Deal with dispute resolution between shareholders should a dispute arise

When does the Shareholders’ Agreement end ?

The agreement can end at a time when all the shareholders agree. They also end when a company takes on a new investor who will want to make sure that the old shareholders agreement is cancelled and a new agreement is put in place to protect the investor’s investment.

What are the required formalities ?

The agreement should be in writing and signed and dated by all shareholders. Ideally the Company should also be a party to the agreement. Finally it is best that before any business venture starts trading  that the shareholders agreement is entered by the shareholders so that each party is clear what their rights and obligations are. As shareholders agreements can be quite complex documents business it is best to have them drafted and reviewed by a solicitor. Each individual shareholder will need to be separately advised as they each have their own interests to protect.