What is a Shareholders Agreement?

A shareholders’ agreement is an agreement entered into between all the shareholders of a limited company and the company itself.  It sets out the way in which the shareholders each agree the business will be run for their mutual benefit.  A shareholders’ agreement sits alongside the company’s articles of association but unlike the articles (which anyone can view at Companies House), a shareholders’ agreement is a private agreement.  For this reason, it is commonplace to include more sensitive/personal agreements in a shareholders agreement rather than the articles.

A shareholders’ agreement can be drawn up at any time, even if your business has been trading for many years without one in place. It is also very sensible to have a shareholders agreement drawn up if you have a new shareholder joining your company.

Family companies often do not have a shareholders’ agreement in place because of the high level of trust which operates in these businesses.  It is important however for family run businesses to still have shareholders agreements in case family members fall out with each other and such fall outs, regardless of whether they concern the business or not, are likely to impact upon the smooth running of the business. Succession planning also needs to be considered carefully, especially in a family business.

We would strongly recommend that all companies have a shareholders’ agreement as resolving any later disputes can be extremely expensive, stressful and would likely interfere with the running of the business.

Why should I have a shareholders’ agreement in place?

It is the role of the directors to run the business, and decisions are made by directors on a majority basis.  It is not always the case that all the shareholders will also be directors, and these types of shareholders have no control and little influence over the way in which the directors run the company without a shareholders agreement in place. Anyone who is only a shareholder of the company (and not also a director) you are only entitled to receive a copy of the company’s accounts each year and to be paid a dividend if one is declared by the directors.  The law does not require the directors to consult with you before they make important decisions about the company.

Even if all the directors are also shareholders the following situations should be considered:

• If a company has majority and minority shareholders who have different levels of interest in the company the shareholders should regulate how their respective interests are protected in a shareholder’s agreement
• If there are only two directors, this can give rise to a deadlock situation occurring if the directors cannot both agree how the business should be run or meet eye to eye on important decisions which need to be made.
• In all cases, it is sensible to consider what exit plans there are for your business in cases where shareholders decide to resign/exit the company in the future, a shareholder passes away or if one shareholder wants to sell the company to a third party.

What should a shareholders’ agreement contain?

A standard shareholders’ agreement will usually cover the following matters:

• The activities of the business – it is usual to include a provision that all the shareholders must agree if the directors want to diversify into other business activities.
• How additional needs for investment will be contributed by the shareholders.
• How the shareholders can remove or appoint new directors.
• That the directors’ salaries are to be agreed by the shareholders.
• What information about the company the shareholders are entitled to request. This is important if some of the shareholders are also not directors.
• How often the directors are to meet to make decisions about the company.
• Which important decisions need to have the shareholders’ consent to limit the directors’ control. Again, this is important where not all the shareholders are directors.
• How shares are to be transferred or sold to others in the company and third parties. This is important for succession planning.
• What happens to a shareholder’s shares upon their death, whether the other shareholders in the company have the right to purchase the shares from that person’s estate.
• Whether shareholders are restricted from working/being concerned with other companies, both while they are a shareholder and after they have disposed of their shares. This can be important to protect the company and the remaining shareholders’ investment.
• How any disputes between shareholders are to be resolved. This is important to ensure there is not a harmful deadlock situation, which can impact upon the running of the company.

It is possible to include other bespoke provisions into your shareholders’ agreement that are relevant to you and your company. This is why you should take specialist legal advice to have a tailored agreement that effectively meets your needs.