A shareholders’ agreement is a contract between the owners of the shares of a company. Its purposes are to protect the value of each owner’s investment, to regulate a fair relationship between them and to control the management and strategic direction of the company.
There are certain basic provisions that most well drafted documents will contain, but there are no exact requirements for content. A document will usually cover:
- the relationship between the shareholders – rights and obligations
- how the corporation will be controlled and managed, and by who
- how decisions are made
- methods of dispute resolution if disagreements arise
- what happens when a shareholder wishes to sell his shares, becomes bankrupt or dies
- restrictions on the rights of new shareholders
- equity and debt financing
- restrictions on significant expenditure, including dividends and director remuneration
Unlike the other governing document of a company – the articles of association, a shareholder agreement is a private document that is not submitted to Companies House and is therefore not available for public view.
The agreement can be between all shareholders, or just some, such as the owners of a particular class of shares. It can benefit both the owners of the majority of shares, and minority owners.
Must I have one?
Putting an agreement in place is not required by law. However, most business advisors would recommend having one in place as soon as possible after the company is formed and the first shares are issued.
It is easy to defer putting an agreement in place. Perhaps the establishing the business is more important. Or perhaps the founders are trusted family members or friends who seem to share the same goals and ideas as you for the business. Asking for an agreement may seem disrespectful.
However, the reason to put an agreement in place now, is as a safeguard for the future. It is your investment that you are protecting, but it is also that of the other founders, and the business itself. Disputes do happen often, are costly, and take management time away from the business.
Your articles of association may help you resolve problems to some extent, but a shareholder agreement is likely to give you far more protection in a greater number of circumstances.
It is easier to sort out putting in place a document earlier, while you are likely to agree on more matters, than later, when expectations and feelings may have changed. It will give you all increased confidence in your future relationship and the likely success of the business.
Drawing an agreement can be a positive exercise, similar to drawing up the first business plan, to bring all founders together on strategy and goals.
Changing the basis on which votes are decided
The most significant feature of a shareholders’ agreement is that the basis on which the shareholders make decisions can be varied.
By default under the Companies Act, motions at shareholder meetings are carried if the shareholders who between them own more than 50% of the voting shares of the company agree (in certain cases, the threshold is 75%).
Founders can agree to change this basis for certain types of decisions. There is quite a lot of flexibility.
For example, every person might have one vote, regardless of the number of shares. Or someone might have two votes, while the others have one. The changes to the rules might apply to a type of decision, such as decisions to borrow money, or in a particular situation such as when an offer has been made by an outside party to buy the company.
Being able to change how decisions are made allows both majority and minority owners greater influence over matters of company management that are important to them. Because each shareholder will have different concerns, this feature allows each one to negotiate a more favourable position for themselves that increases the perceived value of their investment in the company.
When it can be advantageous to all founders to put a shareholders agreement in place, there are very few reasons not to do so.