Shareholders’ agreements provide a foundation for shareholders to maintain cohesive ownership and management of a company. They are especially important where a company has several shareholders with varying degrees of involvement to ensure that each shareholder is clear as to their rights and responsibilities within the company.
Shareholders’ agreements are contracts between shareholders which set out the rights and obligations that arise as a result of owning shares in a company. They are a particularly important consideration for new companies as they will often minimise the risk of disputes arising in the early days of a company’s operations and throughout periods of development and growth.
Shareholders’ agreements are particularly useful where a company has several shareholders, some of whom hold a minority interest in the business. Commonly, this occurs where the board of directors are also shareholders and there are other members who are not actively involved in the business (e.g. investor shareholders). Investors will almost invariably want to safeguard their investment by securing their input in the decision-making process of the business.
Where a company’s shareholders are bound by the terms of a shareholders’ agreement, the usual remedies for breach of contract are available if any shareholder acts (or fails to act) in breach of its provisions.
Shareholders’ agreements should be read in conjunction with the Articles of Association of a company. Some company decisions will require the shareholders to pass a resolution at a general meeting or by way of a written resolution. The articles will often reflect the position under the Companies Act 2006 (”the Act”), and require either a simple majority (over 50%) or a 75% majority vote to make certain decisions.
Generally speaking, shareholder power is determined by the number of shares which that member owns in relation to the total number of shares in a company. A shareholders’ agreement cannot restrict a company’s power to exercise its statutory duties under the Act, however it can provide an alternative remedy to minority shareholders when the majority makes decisions in breach of the shareholders’ agreement.
By way of example, where the Act provides that a 75% majority is required to change a company’s Articles, the company itself cannot provide in its articles for a higher threshold. The shareholders can agree to do this privately by way of a shareholders’ agreement. Where such a provision is in effect, the aggrieved shareholders can seek damages or an injunction for breach of contract against those shareholders acting in breach of the agreement. Without the agreement, no such remedy would be available.
There are certain provisions which are typically included in shareholders’ agreements that enable minority shareholders to retain a degree of influence in the company and avoid situations where they are excluded from important decisions that could otherwise be detrimental to them.
A shareholders’ agreement may stipulate, amongst other things:
When there must be a unanimous vote (100%) or specific shareholder approval to prevent decisions that could be detrimental to the minority or individual shareholders;
When matters must be reserved to the shareholders, as opposed to all decisions being left to the board of directors.
Some of the most important terms to include in a shareholders’ agreement should relate to the conditions under which shares can be transferred. Non-compete and conflict-of-interest clauses are also frequently incorporated.
The agreement can provide that unanimous approval is required when:
Other common provisions relate to arbitration and legal proceedings, extending overdrafts, hiring and dismissing staff, and other unusual contractual obligations specific to the particular business which are outside the normal scope of business.
Shareholders’ agreements should reflect the specific requirements of a particular business and its members. They provide a built-in contractual remedy in the event of damaging or deceptive shareholder activity.
Our solicitors have advised many of our clients on the drafting and implementation of shareholders’ agreements and acted for numerous individuals involved in shareholder disputes. To discuss the implementation of a shareholders’ agreement for your business, contact us on +44 20 7353 1770.
For business legal advice and more information on shareholders' agreements and commercial dispute resolution, contact us online or call us on 020 7353 1770.
