Shareholders Agreements

What is a Shareholders Agreement?

A shareholders agreement is an agreement entered into between all or some of the shareholders of the company to regulate the relationship between the shareholders, the management of the company and the actions which the company shall or may not undertake. It thus governs the way in which the company is run and a shareholders agreement will commonly provide for the following:

1. Restrictions on shareholders selling their shares; without such restrictions shareholders may be able to sell their shares to whoever they like which might result in the remaining shareholders being in business with someone they do not know or approve of.

2. Ability to force certain shareholders to sell their shares to the others; this can be useful if a shareholder is not “pulling his weight”, commits some wrongdoing ceases to be employed by the company or in the event of death or bankruptcy of a shareholder.

3. Determination of the correct price to be paid for the shares should a shareholder wish or be forced to sell his shares in the company.

4. Restriction on the issue of shares which could change the proportions in which the shareholders own the company or bring in new shareholders so diluting the existing shareholders interest in the company.

5. Rights of shareholders to nominate a director of the company.

6. Restrictions on the way the company does business, for example spending of large sums of money or committing to big contracts, borrowing or employing staff on high salaries.

7. Restrictions on what shareholders may do outside the company, for example shareholders might be restricted from competing against the company or poaching its staff.

8. Specific actions and objectives the company is to achieve (this would be particularly relevant if the company is to be “groomed” for sale).

9. What happens if the shareholders simply cannot agree on issues affecting them and the company; there will often be provisions in a shareholders agreement for breaking deadlocks.

The absence of a shareholders agreement opens up the potential for disputes and disagreements between the shareholders. The Articles of Association of the company may not offer a shareholder full protection. The Articles of Association will govern fundamental matters like the issue of new shares, the administrative procedures surrounding the shareholders decisions at Board Meetings but are unlikely to influence the day to day running of the business or many issues which the shareholders care about.

The absence of a shareholders agreement will leave many decisions to a majority vote and not provide the minority with safeguards to particular concerns such as a wish to restrict borrowing or the sale of particular assets. The commission of a Shareholders Agreement prompts Shareholders to address and agree important issues. They prevent future disputes and misunderstandings which would otherwise be costly to resolve. This is predominately why as a shareholder the construction of a well drafted shareholders agreement is paramount.

How we can help you

At Colemans we can draft a shareholders agreement to reflect all of your corporate and managerial requirements. We can do this at the commencement of trading or if your company has grown or once it has become established and then on an ongoing basis. If you need assistance in drafting a shareholders agreement then please do not hesitate to contact Nashaud Rahman on 01628 631051.

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This post was written by Colemans Solicitors LLP