What is a Shareholders’ Agreement, and Do I Need One

As the name suggests, a shareholders’ agreement is a formal agreement between shareholders or between shareholders and a company. Shareholder agreements are normally put in place when a company is registered (i.e. formed) with Companies House, and the first shares are issued. In this article, we will discuss the purposes of a shareholders’ agreement, the risks of not having a shareholders’ agreement, when a shareholders’ agreement should be registered with Companies House, the benefits of shareholders’ agreements for minority and majority shareholders, and the contents of a shareholders’ agreement.

Why put a shareholders agreement in place?

Shareholder agreements primarily serve to protect the investment of shareholders in a company. By setting out key matters with absolute clarity, it helps to ensure fairness and trust between shareholders when it comes to how the company will be run. While it may seem acceptable to trust company shareholders to adhere to any verbal agreements reached, drafting a shareholders’ agreement removes the possibility for costly and acrimonious disputes in the future.

What is a Shareholder’s Agreement?

A shareholders’ agreement is a written document entered into by a company’s shareholders or between shareholders and a company. Shareholders’ agreements can be used in a number of contexts, including a:

  • Private limited company with multiple shareholders (the main focus of this article) – used to set out the relationship between the shareholders
  • Joint venture – used to set out the ongoing relationship of parties to a joint venture
  • Management buyout – used to set out the commitment of private equity providers and the management team to subscribe for new company shares

Where a shareholders agreement is used in a private limited company with multiple shareholders, it will typically clarify such matters as:

  • Confidentiality
  • How the company will be run
  • Intellectual property assignment policies and procedures
  • Payment of dividends
  • Protection for minority shareholders (i.e. clarification of voting rights)
  • Pre-emption rights
  • Rights and responsibilities of majority and minor shareholders
  • Rules pertaining to the sale or purchase of shares
  • Shareholder dispute resolution process, and
  • Shareholder’s dilution rights

It is important to note that a shareholders’ agreement is a legally binding contract between shareholders. For this reason, it is important to have a shareholders’ agreement carefully drafted to reflect the needs of your company and its shareholders. Using an online shareholder agreement template may not offer adequate legal protection to shareholders in the future.

Shareholders’ agreements are normally kept private and hence not registered with Companies House along with the memorandum and articles of association. They may, however, be made public if filed with Companies House or if there is a legal requirement to disclose the agreement during legal proceedings.

What is the implication of not having a shareholders’ agreement in place?

There is no legal requirement for companies or shareholders to put in place a shareholders’ agreement. However, not having a shareholders’ agreement in place may mean that there is a lack of clarity regarding important decisions relating to the direction of the company, shareholder obligations, the payment of dividends, and shareholder voting rights. The risk is, therefore, that a dispute will arise in the future regarding what was initially agreed between shareholders. The absence of a shareholders’ agreement may also result in:

  • Deadlock leading to the company being wound up
  • Minority shareholders being able to block the sale of the company
  • Minority shareholders being fully reliant on their statutory rights
  • Shareholders employees retaining their shares after they have left the company
  • Shareholders may leak confidential information
  • Shareholders may be able to transfer their shares to anyone
  • Shareholders not having an exit strategy

By putting in place a well-drafted shareholders’ agreement at the point of incorporation and keeping this up to date as key changes are agreed upon by shareholders, you can focus on the running of the company and achieving your collective business goals without getting bogged down in costly and lengthy internal disputes.

When must a shareholders’ agreement be registered with Companies House?

In most cases, shareholders’ agreements are not registered with Companies House, however, in some limited scenarios, this may be required. For example, if there are provisions contained within a shareholders’ agreement that overlap with the contents of the articles of association, it may be necessary to register the document with Companies House. This is most likely to be the case if provisions in the shareholders’ agreement need to take precedence over provisions in the articles of association. In this case, it should be registered in accordance with sections 29 (Resolutions and agreements affecting a company’s constitution) and 30 (Copies of resolutions or agreements to be forwarded to registrar) of the Companies Act 2006 (CA 2006). Doing so will ensure that there is no conflict between the provisions in the articles versus those in the shareholders’ agreement.

Benefits of shareholders’ agreements for minority shareholders

Shareholders’ agreements enable minority shareholders (i.e. those with less than 50% shareholding) to have a greater say on the running of the company. Without a shareholders’ agreement, they may have little say at all, as most decisions will be made by those with a majority stake. It is important to remember that where provisions are made for minority shareholders in the articles of association, these can easily be changed by way of a special resolution. Shareholders’ agreements may include provisions for minority shareholders that give them a greater say over matters such as the issuance of new shares, the appointment or removal of directors, company borrowing, and any changes in business function. For example, a provision may be added to a shareholders’ agreement stating that if a majority shareholder wishes to sell their shares, the offer must be made to all shareholders, including those with a minority share of less than 50%.

Benefits of shareholders’ agreement for majority shareholders

In some cases, shareholders may wish to include certain provisions that ensure majority shareholders can realise their investment in the future. For example, they may include a “drag-along” provision so that if a majority shareholder wishes to sell the whole company, the remaining minority shareholders will also need to take part in the deal and sell their shares. Even if such a provision is in place, any deal reached must still be fair for all shareholders, including those with a minority stake.

Shareholders’ agreements may offer additional reassurance to majority shareholders that confidential company information will not be disclosed without permission or used to set up a competing entity. They may also include clauses preventing minority shareholders from selling their shares to anyone. Without such as clause, problems may arise if a minority shareholder sells their stake to a competitor or another person who is not interested in furthering the interests of the company. For this reason, shareholders’ agreements often include provisions clarifying who shares can be sold to and under what conditions.

What is contained within a Shareholders’ Agreement?

Shareholders’ agreements typically include several clauses clarifying how a company should be run, including the appointment, removal and payment of company directors, the frequency of board meetings, voting rights, reaching agreement on large capital outlays, and company borrowing. They may also include clauses on the following matters:

  • Shareholder obligations
  • Issuing of further shares – e.g. a provision stating that shareholders will not allot, issue, sell, transfer or otherwise dispose of any shares to any person unless that person is a party to the agreement
  • Transferring shares – e.g. a provision stating that no shareholder shall create any “encumbrance” over the transfer, disposal or giving any person any rights in or over any Share without the prior written consent of the board
  • “Tag along” or “drag along” provisions.
  • Minority shareholder protection – e.g. requiring certain decisions to be agreed to by all shareholders, including those with less than 50% shareholding.
  • Payment of dividends
  • Competition restrictions.
  • Dispute resolution
  • Governing laws and jurisdiction
  • Notice periods – e.g. “Any notice given to a party under or in connection with this agreement shall be in writing and shall be delivered by hand or by pre-paid first-class post”
  • Termination – explaining under which circumstances the agreement will be terminated, e.g. “this agreement shall terminate when a resolution is passed by the shareholders or creditors of the Company, or an order is made by a court or other competent body or person instituting a process that shall lead to the Company being wound up and its assets being distributed among the Company’s shareholders, creditors or other contributors”.

Final words

Shareholder agreements serve a number of important purposes, including protecting shareholders’ interests, ensuring clarity regarding the running of the company, and guarding against disputes. Given their broad scope and overall importance, shareholder agreements should always be carefully drafted in accordance with the unique needs of your company and shareholders. Doing so will ensure your shareholders can realise the benefit of their investment and achieve their long-term business goals.

Click to rate this post!
[Total: 4 Average: 5]

Share this:


Related Posts

Ready to Set Up Your Own Company?

Welcome to our UK company formations portal, where you can set up your company online 24 hours a day.
Scroll to Top