A shareholders’ agreement is a written agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It also governs the way in which the company is to operate and, crucially, minimises the risk of shareholder disputes.
Typical issues covered in a shareholder agreement include:-
- The ownership structure of the company and its shareholdings.
- The management of the company including, removing, appointing, or paying directors.
- Shareholders’ protections, rights, and obligations.
- How the shares can be sold, transferred or new shares issued.
- Decision making including any fundamental matters that require a certain majority vote (often called “reserved matters”).
- Payment of dividends or other distributions.
- Non-compete restrictions on the shareholders.
- Dispute resolution procedures including deadlock provisions.
A shareholders’ agreement is not compulsory, but it is advisable for any company that has more than one shareholder. Otherwise, the absence of a shareholders’ agreement opens up the potential for disputes and disagreements between the shareholders.
If no shareholders’ agreement is in place, the company’s Articles of Association shall be used to determine governance and operation, in conjunction with the provisions of the Companies Act 2006.
Every company is required to have Articles of Association. If bespoke Articles are not drafted, Model Articles of Association will be used as a default. The company should be operated in accordance with these Articles and, if necessary, they can be referred upon if a dispute amongst shareholders arises. In these instances, it is crucial for company directors to fulfil their legal responsibilities, ensuring the company adheres to its legal framework and avoiding potential breaches of director duties.
However, a shareholders’ agreement typically contains far more information regarding the rights and responsibilities of shareholders than Articles of Association do. As a result, the Articles of Association may not always be sufficient to resolve a shareholders’ dispute.
Without a shareholders’ agreement, a minority shareholder with 50% of the shares or less has little control over the company and can find themselves at the mercy of the majority shareholders who have the controlling interest. A shareholders’ agreement can redress the balance for the minority shareholder.
From a majority shareholder perspective, the shareholders’ agreement can provide the tools to help the majority shareholder remove an unhappy/nuisance/underperforming minority shareholder. This can be achieved by having “good or bad leaver” provisions or a mechanism can also be included to force the sale of the minority shareholders’ shares in certain situations, at an agreed or fair valuation, often called “drag along” provisions.
It is not uncommon for shareholders to operate a company on a 50/50 shareholder basis. If a dispute arises between those shareholders and a shareholders’ agreement is not in place, this can result in deadlock meaning that the company is not able to operate and may face potential liquidation. In such a scenario, it would be essential for a deadlock resolution provision to be contained in a shareholders’ agreement.
Very few shareholders believe that a dispute could ever happen to them. It is only when conflict arises those shareholders, whether they are minority shareholders, those in deadlock with 50% or majority shareholders discover that they should have entered into a shareholders’ agreement.
A shareholders’ agreement is more than just a legal document — it’s a vital tool for ensuring your business runs smoothly and fairly. From clarifying shareholder roles to protecting minority interests and resolving disputes, it creates a framework that helps you navigate challenges as your company grows.
Contact our Corporate team for more information [email protected]
