Shareholders’ Agreements are commonly used in two scenarios:
A joint venture between two or more persons, where the parties to the venture agree to set up a joint venture company or partnership. The Shareholders’ Agreement (commonly called a “Joint Venture Agreement” in this circumstance) provides a supervening set of rights and obligations, independent of the joint venture company’s constitution (if a joint venture company is used). The Shareholders’ Agreement sets out those rights and obligations (and any other details) that are inappropriate for inclusion in the constitution, or that the parties wish to remain confidential.
A Company with several or numerous shareholders. The Shareholders’ Agreement sets out the shareholders’ rights and obligations in relation to the company, and is essential to govern the management of the company, and to protect the interests of all the shareholders in the event of changing circumstances.
Such an Agreement commonly includes, among others, policies governing the following matters:
The company structure: Includes composition of the capital of the company, and its internal rules relating to share allotment and transfer.
The appointment of directors: Includes the power of each shareholder to appoint a director or directors, and the authority of such directors when making decisions. May also cover situations where additional directors are appointed in the event of additional shares in the company being issued to third parties.
Management of the company: Covers the appointment of the company management (e.g. director, managing director), and requirements on the company management to prepare financial and management reports for the shareholders (e.g. monthly financial statements to be prepared in accordance with generally accepted accounting principles applicable at the time).
Shareholding restrictions and the transfer of shares: This may include a provision that, if one shareholder dies or wishes to sell its shares in the company, the other shareholder has the first option, on certain terms, to purchase the shares. Other provisions may include prohibitions on transfers of shares or interests in shares except in certain circumstances, the procedure for the transfer of shares and the procedure for calculating a fair value for the shares.
Adding new parties to the Shareholders’ Agreement, and additional shareholders.
Restrictions on the activities of the company (e.g. “major activities” involving substantial amounts, or affecting the nature or structure of the company) unless such activities have the unanimous approval of the directors of the company.
Dividends, and the provision of additional funding by the shareholders: Includes the methods and the proportions in which the shareholders will provide funds to maintain the company, the amount of the profits to be allocated as dividends each year, and a procedure for resolving disputes that arise in respect of these matters.
The rights of shareholders and directors: Includes shareholders’ access to records, and any variations or additions to the statutory powers, rights and duties of shareholders and directors.
Dispute Resolution: For example, a provision dealing with the resolution of disputes involving matters which could lead to substantial injury to the company as a going concern, and which seem incapable of satisfactory long-term resolution by mediation or negotiation.
Non-competition provisions i.e. preventing either shareholder from setting up a business in competition to the company within a prescribed time period and geographical distance from the company.
Confidentiality: Includes provisions relating to the exposure of company documents, both during the period of the Shareholder Agreement and following the termination of the Agreement.
It is not a legal requirement for a company to have a Shareholders’ Agreement. So what are the benefits of having an Agreement?
Avoiding disputes because the parties have already agreed what should happen in certain circumstances – i.e. how to deal with deadlock in the event of equal shareholdings
To regulate the internal management of the company
It can be designed to protect minority shareholders
It can place restrictive covenants on shareholders who leave the company
It can restrict to whom a shareholder can transfer shares
A Shareholders’ Agreement is a contract between all of the shareholders of a company. Once in place it can only be amended with the agreement of all of the shareholders, whereas the company’s Articles of Association can be altered by a 75% majority; this means that the Shareholders’ Agreement is a better protection for minority shareholders.
The Shareholders’ Agreement is not a public document registered at Companies House in the same way that the company’s Memorandum and Articles of Association are, so internal company management can be kept private with a Shareholders’ Agreement.
A Shareholders’ Agreement is particularly useful in situations where a company has no majority shareholding, because of the correspondingly high potential for the company to be adversely affected by disagreements between shareholders. The Shareholders’ Agreement could specify the management structure of the company, and provide a dispute resolution mechanism for resolving disagreements between shareholders.
Excellent experience start to finish – always very responsive to any queries and the turnaround on the property I was buying was very quick, even in the busy time leading up to stamp duty deadline. Jenny was always very helpful and went above and beyond to close on a short timescale.
“Very approachable, practical solutions to problems, but most of all very responsive which I personally think is very important because if you need help, you need it quickly, or at least to know someone is looking at it for you”.
Joanne Rowe, Finance Director, Greater Manchester Chamber
“Always able to contact, very approachable, friendly and professional”
Nives Feely, JAM Recruitment
“I believe I have been able to establish a professional working relationship with everyone I have come into contact. Importantly, I sense the relationships which have been established give me the confidence that I can make contact with Davis Blank Furniss at any time and on any matter. I would also like to express my thanks to the very impressive “gatekeepers” who work in reception, not only for making me very welcome, but also for their professionalism”
Bill Pryke, CEO, Chartered Institution of Civil Engineering Surveyors
“Thank you for your efficient and friendly help throughout this process. We have had it easy but your approach has been part of that”.
Robert Amsbury (Conveyancing Client)
“I would like to take this opportunity to thank you personally for the ongoing support and assistance the firm has offered to our parents over the years. I hope also that we may be able to call on you if necessary in the future.”
Valerie Fisher (Probate Client)
“Jo always provides great service, understands our needs and delivers on her promises. Our needs are relatively simple but the complexity arises out of the volume of work and short time frames, Jo always delivers.”
Peter Fernandez, Corporate Director at Royal Bank of Scotland
“A big thank you to all who dealt with my wife’s claim… We would not hesitate to recommend Davis Blank Furniss to anyone that may be in a situation like we have been…”
Anon (Personal Injury client)
“Before putting my case in Kirsty (Morbey)’s capable hands I’ve met a couple of other solicitors. None of them listen to me as intently as Kirsty and showed me as much empathy and understanding as she did. Simultaneously she was able to look at my case from legal perspective, explain all the options and follow each of our meetings with written summary of the discussed matters (in timely manner). Her advice was invaluable and led me to successfully ending the case matter (hopeful for good). I’m forever grateful for he work and would definitely recommend her to anyone looking for reliable, knowledgeable and committed solicitor”.