Shareholders’ Agreement

A shareholders’ agreement is a must for maintaining a good relationship between shareholders. It protects members’ interests and can save considerable time and costs in the future by avoiding shareholder disputes.

It is also a private way to regulate company relationships as your shareholder agreement does not need to be filed at Companies House like your Articles of Association do.

Typically, a shareholder agreement will include provisions about 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. A carefully crafted shareholders’ agreement should ensure that the remaining shareholders retain control to protect business continuity and shareholder values. It can contain restrictive covenants which will bind outgoing shareholders and protect the goodwill in the company.

Getting specialist legal advice for your shareholders’ agreement is essential to carefully tailor it to your commercial needs. For example, the agreement could contain provisions to protect minority shareholders or, on the other hand, provide the majority shareholder with all the decision-making powers within the company.

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 update 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.

What is a shareholders' agreement?

A shareholders' agreement is a contract between the shareholders of a company. It works together with the general law as well as with the company's articles of association, to set out the rights and duties of the shareholders. It can also save considerable time and costs in the future by avoiding shareholder disputes.

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 business, these decisions are taken by the board of directors.

Even though directors run the business, shareholders that own at least 50% of the company can, essentially, control the overall decisions for most of the business. Shareholders that own at least 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 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 business make decisions. Each shareholder can use their votes to regulate the way the business 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 deadlock until someone is willing to budge. 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. Examples of this could be the company moving premises, company merges or sale of company property.
  • An agreement can 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 contributed 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 stay clear of any escalating disputes between shareholders. From 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.

What should we include in a shareholders’ agreement?

Some key things to cover include:

Decision-making

Usually, shareholders would have little say in the running of the business unless they were a director. 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. It can also allow them to be a part of board discussions relating to serious issues such as 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.

Directors

Shareholders often want some control over is the appointment and dismissal of directors, as well as the pay and benefits that they receive. A directors’ 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 to the first refusal of the shares being sold. The directors may have to approve the sale of shares. It can also cover what happens when new shares are issued.

Provisions within the agreement may also cover the possibility of the majority of shareholders agreeing to sell the business, and if the remaining shareholders could sell along with the majority at the same price.

Capital

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 the financing via the shareholders’ agreement. This can be through things such as working capital which is especially useful in start-up companies.

How disputes should be resolved

If a company is owned in 50/50 shares it is certainly worth including dispute resolution agreements and what process should be followed if disputes can’t be settled. How a shareholder may exit the company for example.

Confidentiality and restraints

Confidentiality is extremely important for many companies and extending this to shareholders can be a crucial part of a shareholders’ agreement. On top of this, a business might want to provide certain restrictions such as preventing shareholders from setting up competing businesses or dealing with existing customers.

Do shareholders’ agreements override articles?

No, if there is a conflict then articles will triumph over a shareholders' agreement. It is possible, however, to put in a shareholders' agreement that if a conflict does arise then the directors and shareholders can act together to change those articles. This way the articles will agree with the provisions of the shareholders' agreement.

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. We strongly advise that you have a legal professional draw up your shareholders’ agreement. This way you know that all bases relevant to you are covered.

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.

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