Shareholders’ Agreement FAQ

by | Nov 23, 2021

Setting up shareholder procedures, terms, and regulations can sometimes be complicated, so we’ve put together an easy-to-understand FAQ covering some of the most common questions we get asked about Shareholders’ Agreements.

When it comes to creating a shareholders agreement, we’d advise employing a professional service to guide you through the many intricacies of your unique business. Without an expert to steer you through the many elements of the contract, it’s easy to overlook problems that regularly occur in other organisations. A legal professional has the experience and expertise to cover all eventualities, including those problems you’re unlikely to anticipate.

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is a contract that defines shareholder roles and behaviours, rules for appointments and purchases, and how each company must manage dividends, meetings, duties, entitlements, rights and use of information, and more.

The agreement clarifies disputes and issues when they arise, allowing a smoother, more straightforward path to resolution governed by a previously agreed upon set of fair-for-all procedures.

What types of shareholders are there?

First, there are public and private company shareholders. Despite both types of organisations having directors, managers, and shareholders, their interactions and responsibilities can differ.

Public company shareholders

There are often higher numbers of shareholders and investors in large companies and organisations, with very different roles: some directly involved with the business operation, and others purely motivated by their investment returns.

Private company shareholders

Smaller, private companies tend to have fewer shareholders. These are often directors with a direct role and responsibility to the operation of the business. Depending on the number of shares each holds dictates minority and majority shareholders. A Shareholder Agreement protects both types of shareholders, creating fairness throughout both business operation and control.

Minority shareholders

The Shareholder Agreement delivers regulations, providing security for those with less than 50% of the issued share capital from vulnerabilities. Without an agreement, it would be easier for majority shareholders to overrule minority shareholders during crucial decision-making and even buy them out against their will.

Majority shareholders

Majority shareholders may need protection against company directors if they don’t hold any board-level power or representation. Also, they may require legislation to manage shares when they want to sell or during disputes over ownership and allocation when minority shareholders are selling, forcing a majority shareholder into a disagreeable situation.

What should a Shareholders’ Agreement contain?

Protection.

Ultimately, every business contract is created to protect the company, its owners and managers, shareholders, workers, and partners. A Shareholder Agreement is no different; however, the key question is who and what this agreement is designed to protect?

There are five key areas each Shareholder Agreement needs to contain. Each of those is further broken down to cover specifics, meaning the document can soon become complex in providing the guidelines to simplify resolution in all kinds of eventualities.

Items in the interest of the shareholders

Many shareholders invest in a business with the sole intention of financial benefit, via dividend payments or by selling the shares in the future after appropriate company growth.

In these instances, the fundamental interests are the value and timing of dividend payments, status and benefits of ongoing employment, the ability to influence business strategy and direction, and the maintenance of relationships with suppliers and customers.

The agreement restricts freedom of action by directors and shareholders, protecting minority shareholders that hold fewer privileges.

Shareholder value

Valuing each company is incredibly subjective, especially when considering the intellectual property. As a result, the accountant typically decides the value of company shares based on their opinions of the company accounts.

Decision making roles

Shareholders can be passive or active in running the business. Whichever the action, each role must be set within clear boundaries to define decision-making protocols. The agreement protects minority shareholders against a director-shareholder that would attempt to create change to benefit their personal needs.

Voting power

Traditionally, majority shareholders held the majority of the power with 1 share = 1 vote. However, that doesn’t always create a fair path through decision-making. In some instances, each shareholder may be entitled to their say or vote. So deciding what constitutes a majority for each situation needs to be laid out in the agreement.

Possible issues necessary to cover

Planning for every eventuality is impossible. Planning for those that are likely, or have shown to be regular occurrences, limits the amount of conflict. This is essential to resolve disputes that hinder the operation of each business and its people.

For example:

1. Directors/shareholder conflict

2. Transfer of shares

3. Managing change in business direction

4. Managing changes in shareholder roles

5. Loan management and lender power

6. Managing competitor or partner investments, loans, and subscriptions

7. Shareholder exit procedure

8. Joint venture procedure

9. Former shareholder becoming a competitor provision

How to draft a Shareholders’ Agreement

Once the causes of possible issues have been considered, the next step is to include each element’s governance into the contract.

The following list demonstrates the type of elements a Shareholder Agreement needs to cover.

· The nature of the business

· The company operation

· Decision-making

· Drag and tag along provisions

· Rights and obligations of shareholders

· Contributions

· Procedure for the issue and transfer of shares

· Circumstances under which the company may be sold

· Appointment and removal of directors

· Key roles and responsibilities

· Dispute resolution procedures

· Minority shareholder protection

· Majority shareholder protection

· Dividends payment

· Non-competition obligations

· Shareholder exit (for example, retirement or death)

· Remedies for breach of the agreement (for example, deemed transfer of shares)

· Appropriate good/bad leaver provisions

· Indemnities between shareholders and apportionment of liability

With defined terms of operation, any disputes that arise are far easier to manage than where no agreement exists. However, in cases where no agreement exists, specialist litigation or dispute management services need to be employed to resolve those situations swiftly and fairly for all parties.

Does a Shareholders’ Agreement need to be registered?

No. A Shareholders’ Agreement is a private document, so it doesn’t need to be filed at Companies House. It also allows the record to remain confidential to the business, its directors, and shareholders.

Is a Shareholders’ Agreement legally binding?

Once signed, the Shareholders’ Agreement should be legally binding, as it constitutes a formal contract.

To comply, it needs to process an offer, acceptance, consideration, and intention. The consideration needs to include something of value being passed within the agreement, usually the price of the shares. If no set value is attributed, a nominal figure of £1 is allocated.

Do all shareholders have to sign a Shareholders’ Agreement?

No one shareholder should be made or coerced to sign the agreement; they must sign the contract voluntarily. In certain circumstances, it isn’t appropriate or necessary for each member to sign an agreement.

If you’re unsure whether you need a complete set of signatures on your contract or not, our advisors will be happy to answer your questions and connect you with an ideal partner service.

Does a Shareholders’ Agreement override ‘articles’?

The ‘Article of Association’ is a mandatory contract defining the responsibilities of the directors, the business operation, and how shareholders can control the company directors.

The Shareholders’ Agreement is a private contract governing the rules of running and owning the company. It contains more aspects designed to protect and resolve conflicts arising from shareholders and directors relationships.

If both contracts have been created correctly, there should be no conflict in what they cover. However, where such a dispute arises, the articles usually takes precedence over matters relating to the company, and the Shareholders’ Agreement prevails in matters of the shareholders.

Why should I have a Shareholders’ Agreement?

Each shareholder has invested in the company; whether it’s time or money, experience or a specialist set of resources, they deserve the protection that the agreement delivers. It sets out the rules for fair and easily managed relationships, minimising conflict and disputes in a range of typical situations.

What happens if there is no Shareholders’ Agreement?

Without a Shareholders’ Agreement, all shareholders and the company are at the mercy of disputes during any possible future conflict. Where disagreements arise, processes need to be in place to manage resolution in simple and straightforward ways.

And finally…

Given what happens with no Shareholder Agreement, each company must have a correctly constructed contract to prevent future complex disputes regarding company shares.

We always advise that you engage with an experienced legal adviser to ensure your contract is all-inclusive and delivered according to legal requirements. Our experienced legal advisers are ready and waiting to help, so give us a call, and we’ll help you get the ball rolling.

Let’s chat…

The above is intended as guidance only and does not substitute legal advice. Please browse our existing Shareholders Agreement services or get in touch with LegalDrop via our contact page if you need assistance.