As the name suggests, a Shareholders’ Agreement is an arrangement made between the shareholders of a company and (often) the company itself. The Agreement exists alongside the company’s formal constitution (its Articles).
A Shareholders’ Agreement can be entered into at an early stage, when a new company is formed, or later, when circumstances mean that it is appropriate to use such an Agreement.
The Shareholders’ Agreement should be tailored to the particular company and its shareholders and directors (it is not the sort of document where “one size fits all”).
A Shareholders’ Agreement can act as a framework for a range of matters, including
- who decides whether new shareholders can join the company;
- what happens when someone wants to sell their shares;
- what happens to shares in the event of the critical illness or death of a Shareholder?
The Agreement may provide that new shares, or shares which are being sold, must be offered to a particular person first, or that the shares will be offered to all of the other existing shareholders in proportion to their existing holdings. In the case of a sale of shares, provisions may be included for the value of the shares to be assessed by the company’s accountants.
In some cases, for example in a family run company, it may be appropriate for the Shareholders’ Agreement to provide that when a shareholder dies, the shares they held can be passed on to members of their family. In other companies this may not be appropriate, for example if the family members have never been involved in the company and have no experience of its area of business.
Shareholders may want to ensure that certain important decisions need the consent of a majority of the shareholders, or even unanimous consent, irrespective of the number of shares which each person holds. The types of decision will vary from one Agreement to another, such as a decision to change the company’s name, or its type of business. The
Shareholders’ Agreement can be drafted to reflect these requirements.
A company may have been run successfully for a number of years by one or more people who have always been its shareholders and its directors (its “founders”). However the time may come when it is necessary, or appropriate, to introduce new people, for example due to growth in the work load, the need for outside investment, or the need to introduce new skills. In these circumstances a Shareholders’ Agreement can be drafted to safeguard the interests of the founders, by ensuring that they will be entitled to remain a director or the company for as long as they still hold any shares in the company, and/or that certain major decisions can not be taken without their consent.
Although the Shareholders’ Agreement may not fundamentally alter the legal obligations on directors to act in accordance with their statutory and fiduciary duties, it can reserve certain matters to be dealt with by the shareholders. This can be important if some, but not all, of the shareholders are directors of the company. The Shareholders’ Agreement may give some additional rights to those who are not directors. Often this would be a right to receive types of information which would usually only be supplied to the board. An example would be the right to see monthly or quarterly management accounts, not just the annual statutory accounts to which shareholders are entitled.
It is usual for a Shareholders’ Agreement to say that, before a new shareholder joins the company, whether as a result of a new issue of shares or a sale of shares, they will be required to comply with the provisions of the Agreement.
For some companies it may be appropriate to deal with some of these matters in another way. Voting rights and the balance of power might be dealt with by the creation and allocation of non-voting shares. It is important that the circumstances of the particular company, its directors and shareholders, are considered and the provisions of the proposed Agreement are discussed carefully.
The personal circumstances of individual shareholders will vary and they should be encouraged to seek their own professional advice on matters such as Wills and Estate planning, and tax planning.
It is also important to review the provisions of the Agreement from time to time and to make amendments if appropriate. For example, if a founder has retired from the company and sold their shares, clauses in the Shareholders’ Agreement which gave that person particular rights may no longer be required.
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Categorised in: Company Law
This post was written by Adrian Smart