Shareholder Agreements & Disputes
A shareholders’ agreement is an agreement which governs the relationship between directors and owners of a business, whilst protecting members’ interests. A properly drafted Shareholders Agreement which clearly sets out what happens in specific scenarios of the Company’s life can save considerable time and costs in the future by avoiding shareholder disputes.
Getting specialist legal advice for your shareholders’ agreement is essential to carefully tailor it to your commercial needs.
Typically, a shareholder agreement will include provisions which set out how shares may be transferred by a shareholder should they choose to leave the company, or what happens to shares in the event of a shareholder’s death. It can contain restrictive covenants which will bind outgoing shareholders and protect the goodwill in the company and provisions to protect minority shareholders or, on the other hand, provide the majority shareholder with all the decision-making powers within the company. A carefully drafted shareholders’ agreement should ensure that the remaining shareholders retain control to protect business continuity and shareholder values.
A Shareholders Agreement often also leads directors to think about other related matters including Cross Option Agreements and Wills.
We can talk you through all the options and discuss all the potential implications so you can make informed decisions about how to proceed.
What is a shareholders' agreement?
A shareholders' agreement is a contract between the individual shareholders of a company. It works alongside the company's articles of association, to set out the rights and duties of the shareholders to the Company and to each other.
Shares are issued when a company is first set up. These shares represent a portion of the value of the company, determined by the value of the company’s assets.
For a limited company (Ltd) that has issued ordinary shares, each share comes with the right to a single vote on company policies and affairs. However, being a shareholder doesn't give you automatic rights to make decisions on the daily running of the company, these decisions are taken by the board of directors.
Even though directors run the company, shareholders that own more than 50% of the company can, essentially, control the overall decisions for most of the company. Shareholders that own more than 75% will have absolute control.
This setup doesn't always keep every shareholder happy, especially if they only hold a minority of the shares but still want some say in how the company is run. A shareholders’ agreement is essentially about control, and it is an efficient way to regulate the relationship between the shareholders, the company, and their relationship with directors.
Why does my business need a shareholders’ agreement?
A shareholders’ agreement sets out the way the key people in your company make decisions. Each shareholder can use their votes to regulate the way the company is run. For example:
- Shareholders who are not directors of a company may want to have a say in the decision-making process. It might be the case that certain shareholders have invested large sums of capital in the company, and they want that investment acknowledged and protected. Having a say in how the company is run could reassure them that their investment is protected.
- Even smaller companies that may only have two shareholders, for example, could benefit from a shareholders’ agreement. It could be that they want to ensure decisions are only taken in the case of a unanimous vote. The shareholders’ agreement could put plans in place for when this is not the case. Without having an agreement, if both parties own 50% of the business and they disagree on something, the business will be in a deadlock until someone is willing to budge. If that deadlock is not resolved, then without a shareholders' agreement the company may have to be wound up. This can cost time, lost opportunity and potentially a costly legal dispute.
- Minority shareholders that would not usually have a say in the day-to-day decision-making of the company may still want the power to veto certain decisions to protect their own shareholding.
- The agreement will control how shares are issued, sold, and transferred. It ensures that the company's business is kept private and confidential and restrict people who leave the company from setting up as a competitor.
From looking at the examples above, the purpose of a shareholders’ agreement is to balance control fairly between the owners of a company, depending on how each owner has and continues to contribute to the company. It can:
- Alter the ability for shareholders and directors to make decisions.
- Give the minority shareholders (that might have little or no power in running the company) protection rights.
- Help to avoid escalating disputes between shareholders by having an agreement already in place that sets out what to do in those situations.
- Put certain processes in place when a shareholder dies or sells their shares.
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What provisions does a shareholders’ agreement usually include?
Usually, shareholders would have little say in the running of the company unless they are also directors. This could open up the potential for disagreements between directors and shareholders.
A shareholders’ agreement can give shareholders the power to challenge or even reject certain decisions of the Board. It can also allow them to be a part of Board discussions relating to serious issues such as recruitment, acquisitions, business strategy and financing.
The agreement might also detail when and how directors’ or shareholders’ meetings take place along with voting arrangements and quorum requirements at such meetings.
Shareholders often want some control over the appointment and dismissal of directors, as well as the pay and benefits that they receive. A director’s remuneration can directly affect the amount of profit that is distributed as dividends to members.
How shares will be distributed and sold
A shareholders’ agreement should set out provisions for how shares might be transferred after a shareholder either dies, retires from the business, or becomes bankrupt. By including these provisions in a shareholders’ agreement, it will set a pricing mechanism so a fair price can be agreed on the sale of those shares. Remaining shareholders might be given the right of first refusal to the shares being sold. It should also cover what happens when new shares are issued.
Provisions within the agreement should also cover the possibility of the majority of shareholders agreeing to sell the business and/or their shares, compelling the remaining shareholders to sell their shares alongside the majority at the same price.
Capital & finance
Although shareholders are under no obligation to provide any further financial support to the company other than the price they paid for their shares, they can still be invited to take part in financing for a due reward via the shareholders’ agreement.
How disputes should be resolved
If a company is owned by equal 50/50 shareholders, a dispute resolution clause should be included to set out what process should be followed if disputes can’t be settled, setting out how a shareholder may exit the company and get paid for his shareholding for example.
A shareholders’ agreement should include certain restrictions preventing existing shareholders from setting up competing businesses or dealing with existing customers of the company.
Do shareholders’ agreements override articles?
No, unless the shareholders' agreement says so in the event of a conflict.
How to draft a shareholders’ agreement
Although you can find shareholders’ agreement templates online, these are generic and will not have been designed specifically around your company and its shareholders. A shareholders’ agreement should be put in place that deals with your company’s specific needs and circumstances. We strongly advise that you have a legal professional draw up your shareholders’ agreement.
Getting specialist legal advice for your shareholder agreement is essential to carefully tailor it to your commercial needs. We can talk you through all the options and discuss all the potential implications so you can make informed decisions about how to proceed.
Get in touch with our shareholders’ agreement solicitors in Sheffield and Barnsley
Contact our friendly, expert shareholders’ agreement solicitors in Sheffield and Barnsley for all the help you need to create or amend your shareholders’ agreement.
We have local offices across Sheffield on Attercliffe Road and in Gleadless and Hillsborough, plus an office in Barnsley.
Give us a call at your nearest branch or fill in our online enquiry form and we’ll give you a call back as soon as possible.