A shareholders’ agreement

Take five guide - what should be included in a shareholders’ agreement    

Every limited company has Articles of Association which, alongside company law, sets out how the company will operate and how decisions will be made by directors and shareholders. Articles of Association are public documents and for this reason, shareholders’ agreements are used where shareholders wish to make additional arrangements between themselves. A Shareholders’ Agreement should be considered for any business with two or more shareholders.

Every business is different, and we can’t cover every possible point in the guide – but here are five things that should at least be considered in the drafting of these essential documents.


1. How decisions are made

The document should be clear about how decisions are made on day-to-day operational matters. For example, should any director be free to make any decision on behalf of the company, or should a certain number of shareholders, or all shareholders, need to agree? Should this relate to all decisions, or just significant ones, such as the employment of anyone with a salary over a certain figure, or expenditure over a certain sum?

You may agree that some shareholder resolutions require a higher percentage of shareholders to agree than is required under Companies legislation. For instance, the legislation states that a company’s name can be changed if 75% or more of shareholders agree – but your shareholders’ agreement could require the agreement of all shareholders to make this change.


2. The rights and obligations of shareholders

Your agreements should be clear about exactly what is expected from each shareholder. Being clear about this at the start can help avoid conflict and resentment further down the line.

For example, you could set out that all shareholders should work a minimum number of hours a week in the business, or you may set out that some or all shareholders provide value in another way.

If a shareholder is providing finance to the company, and the agreement relating to that is not documented elsewhere, this can be included in the shareholders’ agreement.

Other obligations can also be placed on shareholders, including confidentiality obligations or practical ones such as an obligation to make certain tax elections relating to shares issued.

Youy should also consider what a shareholder should be entitled to by virtue of their shareholding.  Should they be guarantee a seat on the board of directors? Receipt of regular financial information such as management accounts? This should all be made clear and not assumed.


3. Provisions relating to shares

The shareholders’ agreement is the place to set down definitive rules about what the parties can and cannot do with their shares. Questions to answer may include:

Should shareholders be restricted from transferring shares to a third party?  Should they offer them to fellow shareholders first?

Should shareholders be required to transfer their shares at any point – for instance if they leave the employment of the company for any reason, or if they become bankrupt? If so, what value should they receive for their shares?

What should happen when a shareholder dies? This is a complex topic but it’s important to include it – for more information see our Take 5 Guide to what happens when a shareholder dies. <link>

Should the company be permitted to or restricted from issuing shares to third parties?

Should there be “drag and tag” provisions? See our Jargon Buster <link> for more on these.

Do the shareholders wish to specify a policy around dividends? For example, they may agree that a certain percentage of profits will be reinvested or distributed by way of dividend each year.


4. Restrictions on the parties

Your documents should set out any restrictions on the parties involved that are required to protect the value in your company. For instance, shareholders can be restricted from working for competing businesses while they’re a shareholder and for a limited time after disposing of their shares.

Restrictions can also be placed on shareholders to prevent them from poaching customers, staff and suppliers. However, any restrictive covenant of this kind will only be enforceable against a shareholder if it only goes as far as is “reasonably necessary to protect the legitimate business interests” of the company. See more about restrictive covenants in our Jargon Buster <link>


5. What happens when things go wrong

Sometimes, despite your best efforts, you end up in a situation where shareholders can’t agree – you’re in dispute or even deadlock.

It’s good practice to have a mechanism in place in your agreements to deal with this if it occurs.

For some, this may involve mediation or working with some other trusted party who will try to bring the parties to an agreement. Where there is a true deadlock situation and no decisions can be made by the company, some form of Deadlock Resolution should be included.

The Thrings Commercial team supports businesses with legal matters at every stage of their growth, and specialises in the drafting of Articles of Association and shareholders’ agreements.


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