Guide to shareholders agreements

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Tracy Thornton
6 years ago
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1 Guide to shareholders agreements

2 Setting up a business can be an exciting time for all concerned and it s understandable that shareholders often overlook the possibility that a working relationship might break down in future. It is often the case that circumstances change over time and there is a potential for disagreement. This may not be significant at the start of a venture but once a business has started to make money it becomes much more important. The absence of an agreement between shareholders often results in costly disputes over what rights each person has and how the company is run, valued or funded. Failing to document arrangements properly can hamper growth, and uncertainties can arise if one party wants to exit the company or in the unfortunate event that a shareholder dies. A shareholders agreement can provide clarity and peace of mind to all interested parties about what can and cannot be done and what happens when something goes wrong. Some businesses may fear that drafting an agreement at the outset of a business venture instantly implies distrust, but in actual fact clarifying issues at an early stage may help all parties to understand each other s goals and should hopefully help reduce the risk of costly and potentially damaging disputes further down the line. At RPJ Solicitors, we can provide advice on drafting a shareholders agreement that best suits the needs of your company. This guide offers a general introduction to the agreements, but if you require further guidance do not hesitate to contact our experienced team of solicitors. Guide to shareholders agreements 1

3 What is a shareholders agreement? A shareholders agreement is, just as the name implies, an agreement between the shareholders of a company. It sets out the relationship between the shareholders, their share of the company, how the business will be run and what happens if certain situations arise. Shareholders agreements supplement the Articles of Association but unlike the Articles, the shareholders agreement is a private document, and so does not need to be registered with Companies House or made available to the public. What are the benefits to my business? The main aim of a shareholders agreement is to protect the shareholders investment in the company and to establish a fair relationship between them. There are many situations that may arise where the shareholders will not be happy with the standard voting rights in accordance with shareholdings. For example, a company may be reliant on the skills and knowledge of a minority shareholder, or that shareholder may have lent money to the company. Shareholders agreements can set out strategies to help resolve the issues that arise when: A deadlock occurs between the shareholders A shareholder decides to sell his interest A shareholder dies Guide to shareholders agreements 2

4 What needs to be included? A well-drafted agreement sets out in clear and practical terms, the rules for the company and its shareholder(s). What is included will depend very much on your own company s particular requirements, but agreements tend to feature some or all of the following: Purpose of the company - Does the company have a business plan? - What are the expectations of the shareholders? Matters requiring unanimous consent - Should minority shareholders be given veto rights? - What decisions can only be made with unanimous consent? Shares - When, to whom and at what price can shares be sold? - What are the terms regarding the distribution of any new shares? - What will happen if a shareholder dies, sells their shares or becomes incapacitated? - Dividend policy? Directors - Who can appoint and remove directors? - Does each shareholder have the right to appoint a director and must that director resign if the shares are sold or conversely, must the shares be sold if the directorship is resigned? - What rights of management are delegated to the directors? Guide to shareholders agreements 3

5 Finance - How will the company be funded? - Will there be an allotment of new shares to raise capital? Exit strategies - What provisions will be made when a shareholder wishes to exit? - Should they be able to transfer shares to family members? - Will existing shareholders have first right of refusal on the shares? - What if the shareholder wants to sell their shares to a third party considered undesirable by other shareholders? Dispute resolution - How will disputes be resolved? - Will a third party be appointed to arbitrate? Defining the power of shareholders - To what level can individual shareholders act on behalf of the company without consultation and agreement? - How can shareholders be prevented from competing with the company and poaching clients or staff? Guide to shareholders agreements 4

6 What else is required? An understanding of the relationship and dynamics between shareholders, particularly in a small or family business, along with a good knowledge of the common issues that could arise within the company and the range of possible solutions that could be included. Finally, familiarity with statutory provisions, the common law provisions and the company s Articles are all essential when drafting such an agreement. At RPJ Solicitors, we can advise you on how your company might benefit from a shareholders agreement and can draft an agreement appropriate to the needs of your business and its shareholders. Guide to shareholders agreements 5

Robert Hill Partner Robert is a commercial lawyer, specialising in drafting documentation and dispute resolution in business, employment and land law contexts, though he also acts in private law

7 Our Commercial Team The information in this leaflet is intended as a guide only and does not constitute legal advice. We would be pleased to answer any questions or give legal advice relating to any of the matters raised in this guide. Please don t hesitate to contact a member of our Commercial Team today. Robert Hill Partner Robert is a commercial lawyer, specialising in drafting documentation and dispute resolution in business, employment and land law contexts, though he also acts in private law disputes. He is a graduate of Exeter University (LLB Hons) and was admitted as a solicitor in After work with a firm in Brighton, he joined Reynolds Parry Jones in 1983, becoming a partner in robert.hill@rpj.uk.com Samuel Baker Solicitor Samuel is a solicitor in the Company and Commercial Department. He graduated from the University of Sheffield in 2012 with upper second-class honours in Law with Spanish LLB. He worked for a law firm in the North East before joining Reynolds Parry Jones in samuel.baker@rpj.uk.com Guide to shareholders agreements 6

8 Reynolds Parry Jones LLP 10 Easton Street High Wycombe HP11 1NP

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