Every company limited by shares and registered at Companies House has a constitution. That constitution is known as the Articles of Association. The Articles of Association serve as an agreement between each of the shareholders as well as the shareholders and the company and they lay the rules for how the company will be administered on behalf of the shareholders.
Notwithstanding the Articles of Association, many company owners also choose to have a separate shareholders’ agreement in placShareholders agreements contain supplementary provisions that are not included in the Articles of Association. A significant advantage of a shareholders’ agreement is that it is a private document which is not registered with or on display at Companies House.
The most important benefit of preparing a shareholder’s agreement is that it allows clarifying the intentions of the owners of a new or existing company. Quite often, people go into business without fully considering the “what ifs” of the business arrangement. The preparation of a shareholders agreements (and partnership agreements when entering a partnership) usually result in a dialogue regarding the difficult issues which can be resolved and agreed upon in writing. This process saves future misunderstandings and potential damage to a company’s business.
Shareholders agreements can have several objectives depending on the circumstances of the owners of a company:
- Protect the minority shareholders
- Protect the interests of the shareholders who are not involved in the day to day running of a company against abuse by shareholders who are involved in the daily management of the business, usually as directors.
- Protect the interests of shareholders and directors who are disproportionately financing a company with cash, loans and guarantees.
- Have a policy in place for dealing with decision deadlocks, for instance between 2 owners with equal shareholdings.
- Agree on a procedure for dealing with other shareholder disputes.
- Agree on a procedure for dealing with the company’s affairs when everything goes awry.
- Have a procedure in place for when a shareholder wants to leave the business and take out his/her investment or a group of clients or other company assets.
- Agree on a policy to deal with the death or incapacity of a shareholder, i., what happens to the shares, and possibly, the management of the company.
- “Tag-along” or “co-sale” rights, which are agreements to protect the interests of minority shareholders when a majority shareholder sells his/her shares in the company. The minority shareholders are accorded the right to be bought out as well.
- “Drag-along” rights: These are agreements that enable a majority shareholder to force a minority shareholder to participate in the sale of a company.
Shareholder agreement content
- Administrative matters
- The location of the registered office
- The company’s trading address
- Who will be the company accountants or auditors
- Who will be the nominated legal advisers
- Staff hiring arrangements
- Accounting arrangements
- Where the accounting records will be maintained
- Who will have access to the accounting records
- Banking arrangements
- Nominated bank
- Banking signatories and limits
- Electronic transfers and instruction limits
- Funding arrangements
- Conditions for raising extra equity
- Conditions for raising loans and other debt
- Guarantees and indemnities
- Loans from shareholders and security given
- Issuing charges over the assets of the company
- Dividend Policy
- How much profit will be retained
- How much can be paid out if the company has loans outstanding from shareholders
- Share Capital
- Provisions for issuing new shares to existing shareholders to raise capital
- Provisions for issuing new shares to new shareholders to raise capital
- Transfer of Shares
- Provisions for transferring shares among existing shareholders
- Provisions for transferring shares to new shareholders and pre-emption rights
- Provisions for dealing with the transfer of shares in the event of the death of a shareholder
- Provisions for dealing with shares in the event of a shareholder’s bankruptcy
- Provisions for dealing with shares held by a director on cessation of his/her directorship
- Arrangements for valuing shares.
- Management matters
- Related to meetings held by the board of directors
- Related to meetings held by shareholders.
- Day-to-day administration of the company
Rather than giving the directors, some of whom may also be shareholders, complete authority, the shareholders may decide that some decisions will require their approval. A few examples are as follows:
- A change in the Articles of Association
- A change in the activities of the business.
- Winding up the company
- A sale of the business or a part of the business
- The acquisition of another business.
Deed of adherence
A Deed of Adherence is a document by which a new shareholder is made a party to an existing Shareholders' Agreement. It is used when a person or other legal entity becomes a shareholder of a company where a Shareholders' Agreement is already in place.
Guarantees and indemnities
When a small company needs loan finance, the lenders may ask the shareholders to guarantee the loan. A joint guarantee means joint and several liabilities which means that a shareholder’s commitment could be disproportionate to his/her shareholding. Shareholders’ agreements and loan agreements should be structured to prevent this.
Shareholder agreements should make comprehensive provisions regarding the issue of share capital. The issue of new shares or a new class of shares should be a reserved matter requiring the consent of all the shareholders.
Agreements should also deal with the potential problems when shareholders and or directors leave a company in order to join or set up a competitor company.
Your first shareholder’s agreement
The only good advice for shareholders setting up a new company is that they should consult a solicitor regarding the drafting of the shareholders’ agreement. However, that may be an expensive or unaffordable option for many company owners, especially when there is limited capital for establishing the business. We offer a basic document that can be adapted and used as a first agreement. A major benefit of new company owners discussing a shareholders agreement is that the process entails all participants outlining their objectives and requirements. If that can be clearly laid out, there would be a foundation for a business agreement. Later, when the company possesses more resources, solicitors can be employed to prepare a more professional and fuller agreement.
To purchase a draft shareholders agreement
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