Shareholders agreement template

More About PaperRock Shareholders Agreement Templates

Why is a Shareholders Agreement necessary?

In most situations where a company has more than one shareholder, the shareholders should consider having a Shareholders Agreement between them.

Whilst English company law will provide a default legal framework for some of the matters which a Shareholders Agreement will cover, this default position is unlikely to be suitable for all the situations and potential issues which a Shareholders Agreement will deal with.

In the absence of a Shareholders Agreement, the shareholders will have to rely on the company’s Articles of Association and the general law for their rights and obligations as shareholders.

As examples of matters which a Shareholders Agreement may cover and which would otherwise not be covered or apply in the absence of a Shareholders Agreement:

• a Shareholders Agreement may include positive obligations on the shareholders regarding what each shareholder will do to work in or provide services to the business. For instance, one shareholder may work full-time in the business whilst another may have more of a passive investment role
• each shareholder may want to have a legal right to always be appointed as a director of the company (and not be subject to potential removal as a director by majority shareholder vote pursuant to the Companies Act)
• in the absence of a Shareholders Agreement, important decisions which do not require shareholder approval under the Companies Act (or the company’s Articles of Association) can be taken by majority vote of the directors. A shareholder may want to include in a Shareholders Agreement a specific right to approve or veto certain key matters (referred to as “reserved matters”)
• neither the Companies Act nor the Model Articles contain pre-emption rights, tag-along rights or drag-along rights in connection with the transfer of shares
• a Shareholders Agreement may cover scenarios such as a deadlock between two equal shareholders, the future sale of the company and termination of the shareholding relationship

Is there a standard Shareholders Agreement?

There is no single standard Shareholders Agreement.  Key factors which impact the form and consent include:

• are the shareholdings equal (50%/50% shareholdings) or is there are majority shareholder (over 50% shareholding) and one or more minority shareholders (less than 50% shareholding)?
• has the company been formed for a specific purpose or project (a special purpose vehicle or SPV), such as the acquisition and ownership of another company or property, or will the company carry on business as a trading/services company?
• what are the owners’ ultimate expectations for the business – is the aim to grow and then look to sell the company or will the company have no ongoing underlying future value once a particular purpose or project has been achieved or completed?

What does a Shareholders Agreement usually cover?

Typical matters covered in a Shareholders Agreement include:

• shareholders and shareholdings – names and percentage of shares owned
• share rights and classes of share – will all shares have equal rights or will some shares have special rights, for example to dividends or sales proceeds
• shareholder roles – what role will each shareholder undertake from time to time? This could be providing premises, equipment and services, intellectual property or acting as an employee or consultant
• funding – who will provide the initial finance for the business, how will the funding be provided (share capital or shareholder loan), how will it be repaid and what happens if the business needs more money?
• directors – will all or only some of the shareholders be legal directors of the company?
• board decision-making – how will day to day decisions of the business be made and who can make them? What is the procedure for board meetings (including notice period, quorum requirements and voting)?
• important decisions – a list of important and critical decisions which require consent of all (or a specified majority) of shareholders (“reserved matters”), such as a change to the business or the Articles of Association, the approval of the company’s business plan, major acquisitions and disposals and borrowing money
• additional shares and shareholders – what will be the process for bringing in new shareholders or issuing new shares in the company? Should any new shares be offered to all shareholders first prior to them being issued to a person who isn’t already a shareholder?
• deadlock – what happens if one or more events occur where the shareholders cannot agree or are in dispute? Should the agreement provide a legally binding mechanism for what should happen in this scenario?
• termination – how can the agreement be brought to an end?
• restrictive covenants – should the shareholders be legally restricted from competing with the business or soliciting clients, suppliers and key employees? If so, how long should these restrictions last?
• transfers of shares – what rules should govern the transfer of shares in the company? Should transfers generally be permitted or restricted?  Specific issues include pre-emption rights, good and bad leaver clauses, drag-along rights and tag-along rights and for any new shareholder to become party to the Shareholders Agreement
• governing law and disputes – which law will govern the shareholders agreement and in which court (or arbitration forum) will disputes be heard?