8 July 2022, Grant McCall, Director
When advising private limited companies, one of the first documents to discuss is an agreement between the shareholders. This is because in most private limited companies we work with, the directors and shareholders are one and the same. The same tends to apply in family run businesses.
The relationship between the shareholders of a business is vitally important if a company is going to succeed. A shareholders’ agreement allows you to define the relationship between shareholders, set out the rights and responsibilities of each shareholder and provide for how the shareholders must act in certain given situations, for example on death or long term illness of a shareholder who also works in the business.
Drafting shareholders’ agreements
Shareholders’ agreements should be carefully drafted and tailored to meet the bespoke requirements for the Company. This will ensure everyone’s rights and obligations are clear, allow the company to operate effectively and minimise the potential for disputes.
Typically, an agreement will cover at least the following:
- Shareholders’ duties and entitlements
- How the company will be managed
- How shares will be issued to new shareholders
- How directors will be appointed
- How board and shareholders meetings will operate and how often
- How decisions will be made between shareholders
- What will happen if a shareholder wants to leave the business
- The existing shareholders having a first right to purchase a leaving shareholder’s shares
- Shareholders’ rights to information
- How and when dividends will be paid
- How the exit of shareholders will be managed (including the need for non-compete clauses)
- What will happen on death of a shareholder
Reviewing and amending shareholders’ agreements
In the same way business terms and conditions may need reviewing overtime, shareholders’ agreements are flexible documents that can be amended with the agreement of the parties.
When a company starts out, as long as it has 2 or more shareholders, an agreement should be considered. Over time, new shareholders may join the business or the roles of the shareholders may evolve. These are just 2 examples of when a need may arise for reviewing and updating an existing agreement.
My role is not just to reflect the current client objectives but also to work with my clients and plan for the future growth of the business, for example if funding may need to be raised and how this may affect the existing shares in issue.
What is the difference between a shareholders’ agreement and the articles of association?
All companies need to have articles of association but a shareholders’ agreement is optional. Articles of association must be filed with Companies House and are therefore a matter of public record. Conversely, a shareholders’ agreement is a private agreement between the shareholders’ and in most cases, would not need to be filed with Companies House.
When a Company has both articles and a shareholders’ agreement, it is important to ensure there is no conflict between the 2 documents and that the rules under the Companies Act are not breached.
Shareholders leaving a company can be a smooth process or a highly disruptive and litigious process. If there is no planning for how a shareholder can leave a business, there is potential to disrupt the way the business works and the balance of decision making between the remaining shareholders. It is therefore essential that shareholder exits are managed extremely carefully and planned for at a time when all shareholders are in agreement and of the same mind.
A shareholders’ agreement cannot prevent a dispute arising between shareholders but it set out the mechanics for what should happen in the event of a dispute or even define certain actions that could make a shareholder a compulsory leaver. Shareholders agreements can set out a dispute resolution procedure which shareholders must follow before disputes are escalated.
To discuss how our corporate lawyers can help with shareholders’ agreements and corporate compliance, please contact us on 0117 9733989 or by email to firstname.lastname@example.org.