What is a Shareholders Agreement?

04 March 2021

A Busy Office

Reaching Agreement Between Owners of a Company

A Shareholders Agreement is, by its own definition, an agreement between the owners (shareholders) of a company. It is normally between all the shareholders, but it might only be between holders of certain share classes e.g. voting shares.

A shareholder agreement is a binding contract and therefore should be observed. Its intention is to look after each shareholder’s interest in the company and regulate how the business is run.

Discussing a new company shareholder agreement

A well written agreement will:

  • Detail the shareholders’ rights and obligations to each other;
  • Introduce formalities and requirements around any sale or transfer of shares in the company;
  • Explain how the company is going to be managed;
  • Explain how minority shareholders might be protected; and
  • Confirm how important decisions are to be made.

Does a majority shareholder own the company?

In short, all shareholders own the company in proportion to their shareholding.

A majority shareholder would normally want to have the majority say in decisions affecting the company and impose restrictions on what the minority shareholders are allowed to do. There will be restrictions on matters such as confidential information and working for competitors as well as the ability to sell shares to someone whom the majority would not approve.

If a majority shareholder wants to sell their shares but a minority shareholder is unwilling to agree then including a provision forcing that shareholder to sell their shares is important. This is often referred to as a “drag along” provision. This will then allow the majority shareholder to dispose of their shares when and at what price they feel is appropriate.

It is normal for all shares to have the same proportionate value.

There might be an obligation for the minority shareholders to offer up their shares to the other shareholders before selling to anyone else (and at what price).

Can a minority shareholder block a sale?

Without a Shareholders Agreement, a minority shareholder (one owning less than 50% of the shares) will have little protection or say in running the business, and normally be very much on their own.

A minority shareholder may want a provision included in the Agreement that if someone is willing to buy the shares of a majority shareholder, that a shareholder can only sell the shares if the same offer is made to all shareholders including minority shareholders. This is often referred to as a “tag along” provision. This should then ensure that minority shareholders receive the same return on their investment as the other shareholders.

Companies are normally run by majority decision and even if the articles of association include provisions that protect the minority these can be changed via special resolution by holders of 75% of the voting shares. There are laws that provide limited protection to minority shareholders, but these can be costly to enforce.

Being a minority shareholder and having a shareholders’ agreement that includes the requirement for all shareholders to approve certain decisions ensures that you have a say in the important decisions that impact the company. This could be decisions on:

  • the issue of new shares;
  • appointment or removal of directors;
  • taking on new borrowings; or
  • changing the main trade.

However, if all decisions have to be unanimous this could cause problems and ultimately paralyse the company from making decisions and thereby affect its ability to trade properly.

What should a shareholder’s agreement include?

A Shareholders Agreement is a contract and therefore should be written as such. The main ingredients should include the following areas (at least):

  • Issuing and transferring – including the ability to prevent unwanted third parties acquiring shares, what happens to shares on the death of a shareholder, and how a shareholder can sell shares.
  • Including any "drag along" and "tag along" (Sometimes known as "co-sale" rights) provisions.
  • Providing some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders.
  • Paying dividends.
  • Running the company – including appointing, removing and paying directors, frequency of board meetings, deciding on the company’s business, large capital expenditure, providing management information to shareholders, banking arrangements and financing the company.
  • Competition restrictions.
  • Dispute resolution procedures.

Shareholders Agreement v Articles of Association

It is possible that the contents of the shareholders agreement may overlap with other company documents, especially the articles of association. This is a statutory document which can be ‘standard’ or tailored. Most small companies adopt what is known as standard table A articles which reflect company law legislation. This document contains areas of control around, for example, decision making and transfers of shares, but the interests of minority shareholders are not well looked after and perhaps a set of articles which have been specially thought out might suit companies who wish to respect and give protection to its minority element.

How to draft a shareholder’s agreement

Our Shareholders Agreement template has been carefully crafted by experienced and qualified legal experts to cover not only the crucial elements, but also many factors that often cause problems for businesses who have not considered all eventualities.

You can use our easy-to-follow template to craft an agreement specific to your requirements and relax in the knowledge that you’ve got this protection in place Try it now (New Company) or if want to add a new shareholder to your existing agreement Try it now (New Shareholder).

John Davies
1st March 2021

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