Anna Sivula, Solicitor in AMD’s Commercial team, discusses the benefits of shareholders’ agreements.
Shareholders’ agreements should be a key consideration for any private limited company with two or more shareholders.
In the absence of a shareholders’ agreement, a company’s internal affairs will be regulated by the Companies Act 2006 and the Articles of Association. For a lot of SME businesses, the Articles are taken from an incorporation agent or based on the ‘model’ articles which contain standard provisions. Standard Articles may be suitable for a one-person company or a small business that is just starting up but they may not be appropriate for a growth business or one with a more complex share structure.
Articles of Association are a public document and can be accessed by anyone through the Companies House website. Conversely, a shareholders’ agreement is a private contract between the shareholders of a company which does not need to be filed at Companies House.
A shareholders’ agreement is, therefore, a flexible way of regulating a company’s affairs and allows for bespoke drafting, tailored to the specific objectives of the shareholders. Small companies with two equal shareholders who are also directors may only need a simple agreement but companies with several shareholders, some of whom may be investors who do not have control at board level, may need a more detailed agreement.
Some of the key considerations in a shareholders’ agreement include:
- Decision-making – directors have control of most of the Company’s decisions but a shareholders’ agreement can reserve certain key decisions for the shareholders and specify a majority percentage. This is particularly relevant for big decisions such as amending the Articles or creating more shares.
- Share transfers – shareholders may want the freedom to sell their shares while the remaining shareholders may want to ensure they have some control over who becomes a shareholder in their company. A shareholders’ agreement can balance these objectives by providing a clear procedure for share transfers during life and on death.
- Shareholder dilution – a shareholder will not want to find out their share percentage has been diluted without their consent. A shareholders’ agreement should contain anti-dilution protections, particularly to protect a minority shareholder.
- Bad leavers – a shareholders’ agreement can set out clear guidance on what should happen to a shareholder who commits a serious breach of the agreement whilst they are a shareholder. Whilst employment law regulates the actions of employees, the shareholders’ agreement can regulate how shares are dealt with in the event a shareholder/employee leaves the business as a bad leaver. This could include returning shares to the Company, sometimes at a discounted rate.
There is no legal requirement to have a shareholders’ agreement but companies with two or more shareholders should consider having one in place. In our experience, trying to resolve shareholder disputes without a shareholders’ agreement will always prove far more problematic. It stands to reason that there is less potential for conflict between shareholders when their roles and responsibilities are discussed and clearly recorded from the outset.
If you would like to discuss how a shareholders’ agreement can benefit your business, please do not hesitate to contact our experienced commercial solicitors in Bristol by telephone 0117 9733 989 or email firstname.lastname@example.org.