What is a shareholders agreement?

A shareholder agreement is simply an agreement between the shareholders of a company. A shareholder agreement sits alongside the company’s articles of association and can govern all of the shareholders, or in some cases, only some of the shareholders (for example, those shareholders who own a certain class of shares). It lets you know who owns what part of the company, who has decision making powers, how shares can be created and transferred, and what happens if a shareholder wants to leave the company

What is contained in a shareholders agreement?

Shareholder agreements usually set out the following;

  • Who owns the shares and what types
  • Rights and obligations of the shareholders;
  • How votes are decided
  • How shares are created
  • How shares can be sold or transferred to another
  • Who has financed the company and how repayment will be made
  • Dividend policies
  • Non-solicitation or competition clauses

Why do you need a shareholders agreement?

The underlying purpose of a shareholders agreement is to protect the shareholders’ investment in the company, to establish and maintain a fair relationship between the shareholders and to govern how the company is run. It lets you know exactly how to do certain things and will set out how to resolve dispute should the shareholders fall out. It should be an agreement that you create while you are on good terms to explain exactly what you want to happen should the worst happen, almost like a will but for your business.

Is a shareholders agreement legally binding?

Once a shareholders agreement has been signed it should be legally binding, provided that it complies with the usual 4 aspects of a contract: offer, acceptance, consideration and an intention to create legal relations. The key factor in this to remember is that consideration must be made, meaning that something of value must be passed within the agreement. Most commonly this would be the price that they paid for the shares, whether this is an accurate calculation of the value of the shares or a nominal figure of £1, a value must be placed on the shares.

Is a shareholders agreement mandatory?

Not as such, when you incorporate your company you must allocate shares to people, and you must also issue articles of association. Often most people will just use the model articles of association, which are a standard form of some rules to govern the company, however these are far from comprehensive and many people who are relying on these when something goes wrong soon find that they are not protected, the clause doesn’t say what they want it to, or it doesn’t have provision for it at all.

Do I need a shareholders agreement if the other shareholder is my wife / husband / friend or family?

It is very important to have everyone’s responsibilities, obligations and liabilities documented. Unfortunately, there are times where even family members or the best of friends can have disagreements. A shareholder agreement allows everyone involved in the company to fully understand what can and can’t be done and can safeguard against potential disagreements down the road. We believe that if a company has more than one director you should always have an agreement, even for a husband and wife team it can be beneficial just to let both parties know what will happen either if the best happens and you wish to sell some shares for an extraordinate amount of money, or if the worst happens and the couple breaks up, it is simply a safeguarding process to let them know how they should proceed in such situations.

Can you change a shareholders agreement?

Yes. A shareholders agreement can be changed in the future where this is required as long as all of the shareholders consent to the changes that are requested. This often may happen if you are adding or removing shareholders, changing the amount of shares or even changing your dividend policies. You could make an amendment by adding a schedule to the document, agreeing special conditions via email or changing the document itself, however if you are amending the document itself it is a good idea to get a legal eye to either oversee or make the changes. When changing legal agreements it is very easy to change a word or two around and completely change the meaning of the clause, often we also see people adding clauses to the document but not reading thoroughly enough to ensure that the clause isn’t already in the document, or if a conflicting one is in there. We would always recommend if you insist on changing the document yourself that you do so in a schedule.

Are shareholders agreements public?

No. Shareholder agreements are designed to sit alongside your articles of association and are not documents that are intended for the public to see. They are an agreement that you keep with your company files and accounts which should not need to be looked at until there is a problem, in the same way you don’t actively use your insurance or your will. A shareholder agreement may be held by your accountant or with your usual filing but is important not to lose just in case; an accountant will be able to keep the document safe and advise you on any major changes in your company in accordance with your shareholder agreement.

What are reserved matters in a shareholders agreement?

Reserved matters are certain key decisions that are approved by a special majority or solely by a named party. Occasionally reserved matters will need to be agreed by all of the shareholders, regardless of their minority shares. These sorts of matters are usually reserved for the most important votes, however may be used for whatever you wish. Reserved matters are usually items like the sale of the company, appointing new directors, changing the nature of the business or even making a purchase over a particular sum.

Is it OK to use a shareholders agreement template?

You can use templates to create your own shareholder agreement, however bear in mind that they are generically written and will not contain any specifics that correspond to your business. A bespoke shareholder agreement will be written to your business alone and contain specific provisions and clauses to ensure that the shareholders are fully protected. There may be particular clauses in there which are irrelevant or even completely contradictory to the way you want things to work. Any specific clauses you want in your agreement you would have to change yourself which poses its own risks.

Do I need to submit my shareholders agreement to companies’ house?

No, shareholder agreements to not need to be filed with Companies House as they are confidential documents between the parties. It is a good idea for your accountant to have a copy or at least be aware of it to ensure your classes and number of shares are registered correctly with companies house, and that the two reflect each other. The document itself and all its provisions can remain a private agreement between just the shareholders if that is what you wish.

What’s the difference between a shareholders agreement and an article of association?

A shareholders agreement is a private contract between all of the shareholders which contain the rules for running and owning the company. Articles of association however, define the responsibilities of the directors, the type of business that is undertaken and the means by which the shareholders exert control over the board of directors. Articles of association are mandatory for a limited company, there are model ones which you can adopt when incorporating, or you can create your own. A shareholder agreement is not a mandatory document to have but it does contain far more protections which will help should you get into any disputes or conflict with shareholders.

Can you also help us to register our company?

We can’t actually register your company – that would be a job for your accountant – however we will often work closely with accountants to ensure the company is registered with the right number of shares and the right classes of shares are allocated. This means that the shareholder agreement and each persons shareholding matches up and is consistent throughout.

What could happen if you don’t have a shareholders agreement?

If you do not have a shareholder agreement in place, then you are exposing all shareholders and the company to a potential future conflict. Without an agreement, the shareholders have no clarity on how to resolve each type of problem when it occurs, which means that if something happened you would have to try to come to an agreement between all the shareholders, which is much harder to do once the issue has already arisen. Sometimes the problem that occurs is a major shareholders death, which will dramatically affect the company. What happens to their shares upon death, are you really comfortable with their next of kin becoming a major decision maker in your company?

Is a company a party to a shareholders agreement?

A company can be a party to a shareholder agreement if that company owns shares in a different company, however usually the company to which the shareholder agreement relates, is not a party to the contract. In the case that a company owns shares in a separate company, the directors of that company will be the decision makers with voting rights as described in the shareholder agreement.

How do you change shareholder percentage?

Shareholders don’t necessarily have a percentage of the company, they have a particular number of shares instead, for a shareholder to change their percentage share in the company they will need to own more or less shares than they currently do. Changing the number of shares can be done by transferring some amongst the remaining shareholders, or by issuing new ones, which often is done at a cost to the shareholder gaining the shares.

Can you force a shareholder to sell their shares?

Without a shareholders agreement in place, there is no automatic right for a majority shareholder to force a minority shareholder to sell their shares and conversely there is no automatic right for a minority shareholder to force a majority shareholder to sell their shares. Normally, within a shareholders agreement, there is a drag-along clause which can force a sale of shares in certain situations. You could also add clauses as you wish, often we add clauses to automatically sell your shares upon death, or if you leave the company.

What happens if a shareholder leaves?

It depends what’s in the contract! You can add any clauses you like as to what happens if a shareholder leaves, we can add clauses so that it differs if a shareholder leaves for good or bad reasons, or differs just for each reason that they want to leave. The important things to think of are what happens to their shares, do they go to the company, to a particular shareholder, or can they sell to anyone they wish? When transferring the shares, how much will the leaving shareholder receive for his shares, will it be a true valuation, a nominal figure or a reduced price? Will they be able to leave and work in a competing business, or will you add restrictive covenants to protect the interests of the company?

Can you fire or remove a shareholder?

Only if the shareholder agreement allows you to. You can add clauses to say when a shareholder would be a ‘bad leaver’ and in this case you may also want to reduce their share value. You may also want to compel a shareholder to leave if they are no longer an employee of the company, whether they have been fired or otherwise. Technically they will still need to be paid consideration for their shares, and essentially sell them, however you can either set a nominal figure of £1 or reduce the share price by a percentage as an incentive to leave on good terms.

Can I sell my company shares to anyone?

It is normal to have a stepped sale procedure when it comes to selling shares. Normally, they must be offered to the majority shareholder first and then down the line of all shareholders in the company. At this point, if they have all refused to purchase your shares, then they can be sold to a willing person as long as all shareholders agree to this. You can arrange this however you wish, maybe offering to minority shareholders first, or even directly to the public, however you best see fit for your business.

What is a minority shareholder of a company?

A minority shareholder is usually someone who has the least amount of shares in the company. Often votes are decided not only by how many shareholders vote for something, but by each shareholder having as many votes as they have shares, therefore a minority shareholder’s vote carries far less weight than that of a majority shareholder. Sometimes minority shareholders may have a different class of shares, A and B shares for example, which may hold different rights and responsibilities, particularly in terms of dividend and voting rights.