Shareholder Agreements

A shareholders’ agreement is an agreement between the shareholders of a limited company. It sets out the terms and conditions on which the business will carry on business and how the shareholders will exercise their rights in relation to the company. A shareholders’ agreement protects the individual shareholder’s position within the company.

The exercise of drawing up a shareholders’ agreement can help to ensure that all of the shareholders understand each other’s points of view about how the company should be run. This in itself can help to identify differing views that may need resolving now.

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 usually do not have a shareholders’ agreement in place, but it is important that they do as family companies are prone to disputes between family members. Succession planning also needs to be considered carefully, especially in a family business.

The law does not give shareholders many rights in a company. As the financial stakeholders of a company, you are entitled to a copy of the accounts each year and to be paid a dividend if one is declared. The law does also not dictate:

• What would happen if you wanted to sell your shares or after your death
• How disputes are to be resolved
• What information you can ask for
• Decisions you have to be consulted about

This is why you should have a shareholders’ agreement in place. It operates like the rule book for the running of the company. It is up to the shareholders to agree their own terms. In most cases, a standard shareholders’ agreement will be appropriate. However, a more tailored document can be put together to meet your own specific needs.

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 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.
• 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.

All shareholders in a company should enter into a shareholders’ agreement. Even if there are only two directors who also the shareholders, you should still have a shareholders’ agreement in place.

You may only need a shareholders’ agreement to deal with succession planning for your shareholding. This is reason to agree between the shareholders how your shares are to be dealt with on your death or if you want to retire from the company.

The following are special categories of shareholders who are especially vulnerable without their rights being protected by a shareholders’ agreement where:

• Not all the shareholders are directors as well. This is because the shareholders who are not directors are reliant upon the directors to provide them with financial information about the company and to make decisions on their behalf. This imbalance can be addressed in a shareholders’ agreement.
• There are minority shareholders.
• New shareholders are introduced into a company.
• The directors’ spouses are also shareholders.
• You wish to issue shares to staff members as part of their remuneration package or to incentivise them to remain with you.