For shareholders within a business with multiple owners, knowing what a Shareholders Agreement is a must. It’s a crucial document that sets out the rights, responsibilities, and expectations of each shareholder.
Not being aware of these elements can prove damaging should there be disputes or disagreements among key stakeholders.
With this in mind, Talbots Law’s Shareholders Agreement experts in this handy guide will explain what a shareholder agreement is, why it’s important, what it should include, and how to create one that safeguards your business interests.
Let’s first explore the definition of a Shareholders Agreement.
What is the Meaning of a Shareholders Agreement?
Put simply, a Shareholders Agreement is a legally binding contract made between the shareholders of a company. It sets out how the company will be run and how key decisions are made, and importantly outlines the relationship between shareholders and their involvement in the business.
While every company must have Articles of Association (a public document filed at Companies House), a Shareholders Agreement is a private contract.
As such, it isn’t legally required but it does provide greater flexibility and protection for shareholders. This makes it an especially valuable tool for start-ups and growing companies.
Shareholders Agreements can cover a vast array of matters. These may include everything from voting rights and management responsibilities to share transfers and dividend policies. In the case of disputes, they can also cover dispute resolution processes.
Together with the Articles of Association, it helps define how the business operates both day-to-day and in the long term.
Types of Shareholders Agreements
There are several types of Shareholders Agreements. Which one you will need depends on what the current structure of your business is, and what the needs of both the shareholder and business are.
Some common types of Shareholders Agreement include:
- Minority Protection Agreements: These agreements are designed to protect shareholders with less than 50% of the company’s shares.
In small private companies, minority shareholders can be particularly vulnerable if control is concentrated in the hands of one or two individuals. These agreements often include provisions that prevent unfair treatment and protect management rights.
- Equal Shareholding Agreements: These are used when shareholders hold equal stakes in a company.
This type of agreement generally seeks to establish mechanisms for decision-making when consensus cannot be reached. It also prevents any single shareholder from dominating the business.
- Founder or Early-Stage Agreements: These are typically put in place at or shortly after incorporation, and clarify the role of founding shareholders.
They may include clauses on founder share vesting and time commitments, or even restrictions on other business activities.
- Customised agreements for private companies: With private companies, shareholder agreements could encompass a variety of other scenarios.
Some of these may include buy-sell provisions, dividend policies, financing arrangements, and protection against share dilution.
They can also include rules for directors who are also shareholders, ensuring that management and ownership rights are clearly defined.
What is the purpose and importance of a Shareholders Agreement?
Together with the Articles of Association, a Shareholders Agreement is important as it helps to define how the business operates both day-to-day and in the long term.
In the process, this agreement seeks to establish clarity surrounding the inner workings of a company, in order both to protect and sustain it moving forwards. It ensures that all shareholders understand their roles and avoid misunderstandings.
It also provides a framework for handling future events that may occur, such as funding rounds, new share issues, or founder vesting arrangements. So, when the company develops, everyone will be aligned on what will change.
But what is actually included within the confines of a Shareholders Agreement?
What is Included in a Shareholders Agreement?
Within a Shareholders Agreement, there are a few key elements that need to be included in order for the document to be functional. These include (but are not limited to):
- Investor consent / reserved matters: Investors often have veto rights over certain key decisions, such as taking on debt, approving salaries above a certain threshold, or major business transactions. The agreement should clearly list these ‘reserved matters’.
- Warranties: These are assurances provided by founders about the company’s status, including debts and IP ownership.
- Information rights: This allows shareholders, particularly investors, access to financial statements and other key metrics to monitor company performance.
- Restrictive covenants: This prevents founders from leaving to start or join competing businesses during or after their tenure.
- Decision-making and voting rights: This will set out how decisions are made, including which decisions require unanimous approval and which can be made by a majority vote.
- Dividend policy: This will outline how profits will be distributed among shareholders.
- Deadlock provisions: This provides mechanisms for resolving disagreements when shareholders cannot reach a decision.
- Confidentiality and non-compete clauses: This protects the company’s sensitive information and prevents shareholders from competing directly with the business.
- Dispute resolution: This establishes procedures for resolving conflicts without resorting to litigation, such as mediation or arbitration.
When is a Shareholders Agreement Needed?
There’s no legal requirement for a business to be in possession of a Shareholders Agreement. That said, once you get external investors involved, creating one is essential.
You should also consider amending or updating your Shareholders Agreement as your business grows. For example, when new investors join, there is a change of ownership changes or your company structure evolves.
Explore our guide to Do You Need a Shareholders Agreement to learn more about when such an agreement is necessary.
Is a Shareholders Agreement Legally Binding?
A Shareholders Agreement is a legally binding contract as soon as it is signed by the company’s shareholders. That means there are enforceable rights and obligations for all parties bound by it.
It also means that should the agreement be breached or violated, there could be legal ramifications for the shareholder involved.
Should another shareholder wish to join a Shareholders Agreement under the terms that have been agreed, they will need to be added via a Deed of Adherence.
Who Signs a Shareholders Agreement?
A shareholders’ agreement should be signed by all parties whose rights and obligations it governs. This typically includes:
- The company itself, represented by an authorised signatory
- Existing shareholders of the company
- Any new investors participating in a funding round
In general, it’s best practice for all shareholders to sign the agreement so that everyone is subject to the same rules and protections, but there are certain provisions whereby only certain signatories need to sign.
An example of this may be asking only those holding voting shares to sign. This can make the process more efficient but usually only particularly when non-voting shareholders are not affected by the agreement’s provisions.
What Happens if there is no Shareholders Agreement?
So what if there was no Shareholders Agreement signed at all?
This scenario may leave your company vulnerable as it will mean it relies solely on the default rules set out in the Companies Act 2006 and the articles of association. These cover the basics of company formation, but crucially do not cover many of the protective measures that a Shareholders Agreement would.
There are many issues that could arise from this, but some of the most consequential may be that there is no clarity over the business’ ownership and unclear processes when it comes to the resolution of disputes.
This also means it’s handy to know the exact difference between a Shareholders Agreement and Articles of Association.
Shareholders Agreement vs Articles of Association: What’s the Difference?
The Shareholders Agreement and Articles of Association have fundamentally different purposes. The Articles of Association set out the company’s internal rules and are a public document filed with Companies House, whereas a Shareholders Agreement is a private contract between shareholders that governs their rights and responsibilities.
Take a look at our Shareholders Agreement vs Articles of Association guide to explore the difference between these two important terms.
Can You Create Your Own Shareholders Agreement?
There are many templates and virtual assistance that will help you to draft a Shareholders Agreement from scratch. However, it’s important to note that doing this may leave you open to certain risks.
Firstly, a Shareholders Agreement should be specific to what the circumstances of your business are. Templates or tools won’t know your situation, and as such won’t reflect the structure, goals, or shareholder dynamics of your business.
Allied to this, they may also miss key clauses that could leave you exposed to disputes or financial loss later on.
That’s why it’s always best to seek expert legal advice when creating or reviewing a Shareholders Agreement. And that’s where Talbots Law comes in.
Contact Our Shareholders Agreement Solicitors for Expert Advice
Every business is different, and so is every Shareholders Agreement. At Talbots Law, our Corporate & Commercial Team take the time to understand your shareholder relationships to draft an agreement that truly reflects your business.
Setting up a new company? Bringing in investors? Or simply updating an existing agreement? No matter what your situation, our Shareholders Agreement solicitors will ensure your interests are protected and your documentation is watertight.
Speak to our Corporate & Commercial Team today on 0800 118 1500, or get in touch online to arrange a consultation.