Shareholders’ agreement

The relationship between the owners of a private company is established by law (mainly, The Companies Act 2006 (Act)) and the company’s constitution (its Articles of Association). In addition, shareholders sometimes enter into a shareholders’ agreement. This is a separate contract, almost always between all shareholders.  An agreement should be considered when the usual legal position is inappropriate for a company. This article looks at some points that could be included in a shareholders’ agreement.

The agreement will often deal with management of the company. A company is managed by its directors. Shareholders have rights to appoint and remove directors and in limited circumstances specified in the Act must give consent before the company can take certain actions. The general position, therefore, is that directors have day to day control and shareholders have ultimate control of the company.

Usually, directors have one vote each and a decision needs a simple majority. Shareholders typically have one vote for every share held – some shareholder decisions require a simple majority, but under the Act some need a higher specified majority.

This can be changed in an agreement. For example, shareholders could agree that

  • some or all directors’ decisions must be unanimous
  • some directors’ decisions must be approved by shareholders
  • a particular individual shareholder or director may have a right to veto a decision
  • a particular shareholder is entitled always to appoint a director

Provisions like this are often referred to as “minority protection”.

Another area often covered in an agreement is transfers of shares. Shareholders may want to make sure that they are all tied in to the company and so the usual rights to transfer are altered. Sometimes transfers are permitted but only to specified people (for example, family members). There may be an absolute ban on transfers unless all other shareholders
agree. A shareholder could be forced to sell his shares in some circumstances – for example, when a shareholder who is also an employee of the company ceases to be an employee.

The agreement could say that if nearly all the shareholders want to sell their shares, they can force the remaining shareholder(s) also to sell. The buyer of a private company will usually want to buy the whole company and not, say, 90%, so this type of arrangement can be very useful. It is normally referred to as “drag along”. There is also frequently a matching arrangement – “tag along”- by which a shareholder can insist that his shares are also bought if most other shares in the company are to be sold.

Shareholders’ agreements are very flexible. If you would like to know more, please contact Clare Richards of Barker Gotelee.

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