A shareholders agreement is a private contract between shareholders (sometimes referred to as business partners) of a company. They are usually private, confidential agreements between shareholders which sets out various terms agreed between them relating to regulating the relationship between the shareholders, their shareholding in the company and how decisions can be made within the company.
Shareholder agreements are separate from a company’s articles of association, but is still a very important document relating to the running of a company.
There is no company law requirement to have a shareholders agreement, however we would recommend that all companies which have more than 1 shareholder should consider putting one in place in order to regulate the relationship between the shareholders and how the business of the company will be run.
A shareholders agreement is a private document setting out shareholders rights, shareholder wishes, and any information which the company might not want to be made public. Shareholders agreements are kept confidential which ensures that confidential information relating to the business is kept confidential. This is often preferred by businesses rather than setting the information out in the company’s constitution. It is a private contract and is not filed at companies house as articles of association are.
Ideally every shareholder of the company should sign up to the shareholders agreement. As this is a contract between shareholders, only the parties to the agreement can be bound by its terms. This means that in the event of any disputes, the provisions and other remedies set out in the shareholders agreement cannot be enforced against any shareholder who has not signed up to it. They will only be legally bound by the provisions of any employment contract they have (if any) and the articles of association of the company.
The company itself can also be included in the parties to the agreement. It is also important to include both the legal owners of shares in the company, as well as beneficial owners, as parties to such agreements.
As it is vital that all shareholders are a party to the agreement. Any new shareholder who either buys shares from a shareholder, or who invests for new shares in the company, should sign up to a “deed of adherence” to any existing shareholders agreement. This is usually contained in all shareholders agreements as a condition for all incoming shareholders.
There are 3 key benefits to having a shareholder agreement in place:
Shareholders agreements can be put in place at any time, however it is best to put it in place as early as possible when all shareholders remain on good terms. It can be difficult to persuade shareholders to agree to the terms of a shareholders agreement if there have been any issues or disputes between them, or if the shareholders agreement would suddenly introduce new restrictions on a shareholder’s ability to take certain actions or decisions.
We recommend that shareholders consider putting a shareholders agreement in place when setting up a new company or a new business, in order to have early agreement on the management of the company. However, it is never too late to put shareholders agreements in place, and an existing shareholders agreement should be periodically reviewed and updated.
A business will usually be expected to put a shareholders agreement in place when a new investor comes into the company, however it is sensible for all businesses where there is more than 1 shareholder to have a shareholder agreement in place.
Every shareholders agreement will be different, however these are some common provisions in shareholders agreements:
It is common for several of the issues set out above to be included in the articles of association of a company either instead of being in the shareholders agreement, or as well as. It is important to ensure that there is no conflict in the provisions set out in the two documents.
Companies will need to decide what information they want to keep confidential between shareholders (and therefore should be included in a shareholders agreement), and what they are happy to be made public in the articles of association.
For companies with different classes of share in issue, the rights and obligations which attach to those shares will be set out in the company’s articles of association. However there may also be some provisions in a shareholders agreement which relate to specific classes of share – particularly with regard to particular rights and obligations.
The legal ownership of shares in the company must always be filed with companies house.
The downside of not having a shareholders agreement is generally only an issue if shareholder disputes were to arise. However, this can then become a significant issue as it can be extremely difficult to remove a shareholder where there is no express right to do so in the articles of association or within a shareholders agreement. In these cases, the shareholders would be left with a shareholders dispute which can often result in delay, expense and disruption to the business.
Shareholders agreements are relevant to businesses of all sizes.
In our view they are very useful for a business which has only 2 shareholders owning 50% of the business each, because they are more likely to end up in a deadlock situation if they differ on how the business should be run or managed. Therefore, by including mechanisms in shareholders agreements which set out what will happen in such a deadlock situation can be very useful. This might include the ability for one shareholder to force the other shareholder to sell their shares in the business.
All parties to the shareholders agreement should take advice to ensure that they are happy with its content and any restrictions included in it. This is particular important for a minority shareholder, to ensure that they understand what their rights are and to ensure that they have some protections under the agreement.
Given the potentially significant impact a shareholders agreement can have on the shareholders rights, the costs involved of taking advice on the provisions in the agreement invariably outweighs the potential risk of not taking advice and ending up in disputes with the other shareholders. Again, this is particularly important for minority shareholders who wish to protect their interests.
Whether a minority shareholder will be able to successfully negotiate the terms of the shareholders agreement will usually depend on the bargaining powers of the parties involved. However, it is important that all shareholders understand the implications of the provisions in the shareholders agreement.
Yes, existing shareholders agreements can be varied (or replaced) in the same way as any other commercial contract. The provisions of the existing shareholders agreement should be reviewed to check whether it states how the agreement can be varied. Typically, all of the existing shareholders will need to consent. However, if a new investor offers the company significant knowledge or financial investment, it will often be in the best interests of the initial shareholders to agree to the variation of the terms of the shareholders agreement.
As Shareholders agreements are private contracts, they would typically be varied by a “deed of variation” or will be terminated and replaced with a new agreement. Whilst all existing shareholders will typically need to sign up to a new agreement, there is no need for a special resolution and therefore no companies house filings necessary.
Sometimes, particularly following a shareholders investment round, new shareholders might insist on a new shareholders agreement (and often new articles of association) being put in place as a condition of their investment. This is particularly common where the new shareholder is either an institutional shareholder, or where they will be a majority shareholder.
If you need any advice on shareholder agreements, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
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