Thu 24 May 2018

Do I need a shareholders' agreement?

This is a question which we are often asked by clients who hold, or are about to hold, shares in a company. 

For those readers who are unsure about what a shareholders' agreement is, it is an agreement which sits alongside a company's articles of association and which is entered into by the shareholders of a company (and often the company as well). The shareholders' agreement seeks to regulate the relationship between the shareholders and clarify certain matters relating to the company and its business. 

An optimist might well take the view that a shareholders' agreement is unnecessary where shareholders get along or are members of the same family.  Sadly the reality is that, from time to time, shareholders in a company do fall out with each other.  By having a clear and concise shareholders' agreement in place, shareholders stand a much better chance of either resolving disputes promptly before they become detrimental to the company's business or, better still, preventing them from occurring in the first place.     

Whilst a shareholders' agreement should be a bespoke document tailored to meet the specific needs of the relevant shareholders and company, the following provisions tend to appear in most shareholders' agreements:-

  • Board of directors.  A shareholders' agreement will usually dictate how directors are appointed to the board and the circumstances in which they may have their office terminated.  The agreement may also stipulate a maximum and/or minimum number of directors and the quorum for board meetings. 
  • Matters requiring consent.  There may be certain decisions of the company which are of such importance that the shareholders agree these should only be taken with the prior written consent of a percentage of the shareholders.  Such decisions may include varying the company's articles of association, changing the nature of its business or incurring borrowings other than in the ordinary course of business.
  • Dividends.  The payment of dividends is an important consideration for any shareholder.  A shareholders' agreement may set out the percentage of profits which are to be distributed by way of dividend in any financial year.  Alternatively, it may simply provide that no dividends are to be paid without the prior written consent of a certain percentage of shareholders.
  • Transfer of shares.  A shareholders' agreement will usually dictate what happens in the event that a shareholder wishes to transfer their shares and whether or not such shares are to be offered to existing shareholders first.  The agreement may also set out circumstances in which a shareholder is obliged to transfer their shares (e.g. on death, cessation of employment, sequestration etc).
  • Issue of new shares.  The issue of new shares in a company has the potential to dilute the shareholding percentages of existing shareholders and thereby affect their rights.  A shareholders' agreement may provide for new shares to be offered to the existing shareholders first in their existing proportions so that they have the opportunity to maintain their shareholding percentage.  
  • Restrictive covenants.  It is becoming increasingly common to see shareholders' agreement include provisions which restrict a shareholder, for the period when they are a shareholder and a period of time thereafter, from competing with the company or enticing away any of its customers, employees or key suppliers.  The length and extent of any such restrictions must be carefully considered so as not to be too wide and potentially unenforceable.

If the shareholders decide that putting a shareholders' agreement in place would be beneficial, we would strongly recommend that a lawyer is instructed to prepare the document.  Whilst this will of course result in some costs being incurred by the shareholders, this will almost certainly be cheaper than the cost of resolving a dispute without a shareholders' agreement in place.

We regularly advise shareholders and companies on shareholders' agreements and would be delighted to have a free, no obligation chat with any reader who would like to discuss how we might be able to help them. 

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