A shareholders' agreement is a crucial document that governs the relationship between shareholders in a company.
It outlines their rights and obligations, specifies what the company can and cannot do, and regulates the sale of shares. Typically, this agreement builds on the company’s articles of association.
Having a good working relationship does help prevent conflicts but issues can still arise. Although the articles of association provide some guidance, a well-crafted shareholders’ agreement offers greater protection for individual shareholders particularly when things go wrong. A shareholders’ agreement fosters confidence among partners and helps prevent costly legal disputes.
Aren’t Articles of Association Enough?
Many might wonder if articles of association alone provide adequate protection. The answer is no, for three main reasons:
1. Limited Protection: Shareholders’ agreements offer more tailored business specific guidance as opposed to the standard articles, which are often created quickly and cheaply, lacking essential protective provisions.
2. Amendment Control: Changes to a shareholders’ agreement require the consent of all shareholders. In contrast, articles can be amended by a 75% majority, potentially undermining minority shareholder interests.
3. Confidentiality: Unlike articles of association, which are public documents filed with Companies House, shareholders’ agreements remain private. This confidentiality prevents access by outsiders, such as creditors or non-member employees.
Who Should Consider a Shareholders’ Agreement?
Any company with more than one shareholder should strongly consider a shareholders’ agreement. This document can apply to all shareholders or be tailored to specific share classes.
Certain situations make a shareholders’ agreement especially vital:
Employee Share Issuance: Companies issuing shares or share options to employees should include transfer provisions to reclaim shares if an employee leaves.
Third-Party Investment: Outside investors often seek some level of control over the company to protect their investment.
Professional Services Firms: Businesses in sectors like law or finance should draft agreements to address consequences if a shareholder loses their professional certification.
Protecting Minority Shareholders
Without a shareholders’ agreement, minority shareholders have limited control over company decisions. An effective agreement can ensure that critical decisions require the approval of all shareholders, which can include:
Issuing new shares
Appointing or removing directors
Approving new borrowing
Changing main business operations
Additionally, a “tag-along” provision may mandate that if a majority shareholder receives an offer for their shares, the same offer must be extended to all shareholders.
Protecting Majority Shareholders
For majority shareholders, it is essential to include provisions that require minority shareholders to sell their shares if the majority shareholder decides to sell. This “drag-along” clause ensures that a reluctant minority does not impede the majority’s exit strategy. Furthermore, shareholders’ agreements can include restrictions on whom shareholders can sell their shares to, protecting the interests of existing shareholders.
Key Clauses in a Shareholders’ Agreement
Shareholders’ agreements typically contain:
Restrictions on Share Transfers: Ensuring that shareholders have a say in who their fellow shareholders are.
Approval Requirements: Mandating shareholder consent for key decisions and expenditures.
Restrictive Covenants: Preventing former shareholders from competing against the company post-exit.
Operational Regulations: Detailing the management structure, including appointing and compensating directors.
Minority Shareholder Protections: Safeguarding the interests of minority shareholders.
Dispute Resolution Procedures: Establishing a clear process for resolving conflicts.
The above example will not all be included in every shareholder agreement but by investing in a comprehensive shareholders’ agreement, you can mitigate risks and establish a solid foundation for collaborative growth, securing your business’s long-term success. While this agreement is hopefully just a document safely stored away and rarely needed, it will serve as a reassuring safeguard ready to deal swiftly and effectively where the circumstances arise.
Contact the expert corporate team at Sweeney Miller Law by emailing jess.fenwick@sweeneymiller.co.uk or calling 0345 900 5401.
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