Shareholders Agreements

Shareholders Agreements

Why is a shareholders agreement necessary?

In most situations where a company has more than one shareholders, 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 is unlikely to be suitable for all the situations and circumstances 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 of them will do to work in or provide services to the business.  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 defined 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)
• important decisions which do not require shareholder approval under the Companies Act (or the company’s Articles of Association) can be taken by the board of directors.  A shareholder may want specific rights to approve certain key matters before they can be carried out (referred to as “reserved matters”).
• in relation to transfers of shares, neither the Companies Act nor the Model Articles contain pre-emption rights, tag-along rights or drag-along rights
• 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?

Whilst they may have many common features and subject areas, there is no single standard shareholders agreement.  One form of shareholders agreement may be suitable for one situation but will be unsuitable for others.  

Key variables include:

• are the shareholdings equal (50%/50% shareholdings) or is there are majority shareholder (over 50% shareholding) and one minority shareholder (less than 50% shareholding)?
• are there more than two shareholders and does any of them hold more than a 50% shareholding?
• is this a single project company (for example, the acquisition and ownership of a particular asset) or a trading/services company?
• what are the owners’ ultimate expectations for the business, for example is the aim to build it up and then look to sell the company or will the company have no underlying future value once a particular project has been 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 – 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?  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 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?
• 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”)
• additional shares and shareholders – what will be the process for bringing in new shareholders or issuing more shares in the company?  Should any new shares be offered to all shareholders first prior to them being issued to a new person?
• deadlock – what happens if 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 bound 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
• governing law and disputes – which law will govern the shareholders agreement and in which court (or arbitration forum) will disputes be heard?