Shareholders Agreement

Shareholder Agreements

In most circumstances, a single share will carry a single vote.  The power of shareholders varies with the percentage of shares they hold – incremental increases of 5% (which can be quite big for large organisations) can increase the rights of a shareholder.

Any shareholder with 50% of the shares will have a controlling stake.  They will generally be in a position to dictate how the company is run on a day-to-day basis.  However, this might prove to be disadvantageous or what is known as ‘unfairly prejudicial’ under the Companies Act 1984 for minority shareholders.  To protect minority shareholders against behaviour which does not break the threshold of ‘unfairly prejudicial’ treatment and redistribute power, shareholder agreements can be made.

Protecting minority shareholders is one uses of shareholder agreements. Given the inherent flexibility of shareholder agreements, there are many circumstances under which one might be made.

Common circumstances in which shareholder agreements are made

Shareholder agreements are commonly used by smaller companies.  In a larger company with thousands of shareholders, it might be difficult to come to an agreement.

Agreements are commonly made where:

•             There are a small number of shareholders who work together and wish to make decisions unanimously.  In effect they can run the business as a partnership but limit their personal liability for company debts.

•             Shareholders want to decide on what will be classed as a binding decision by the board.  For example, will a board decision be binding with 50 or 75% of votes?

•             Minority shareholders wish to protect their interests beyond the protection given by the Companies Act 1984.

•             Shareholders want to decide what happens in event the company is sold, their shares are brought out or the company is publicly listed.

•             The shareholders wish to reserve ownership of the shares to the original holders as much as possible.

•             Shareholders want to preserve the original shareholding percentages as much as possible.

•             One or more shareholders have lent money to the company and have no involvement in the running of the company i.e. at a director level.

•             Shareholders want to prevent other shareholders from directly competing with their company if they leave.  This is relevant where the company is effectively run as a partnership.

Standard versus tailored agreements

Shareholders can practically agree to anything they want to.  This is a big contrast to the way in which the statutory law strictly regulates the formation and running of companies.

Standard shareholder agreements do exist and offer a cheap solution to simple problems. However, where possible it is advisable to make a tailored agreement that fits your circumstances and helps you and other shareholders get what you want out of the agreement.  To make the agreement binding and unambiguous as possible, a specialist company law solicitor will be an invaluable source of assistance.

FAQs about:
Shareholders Agreement

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.

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