Shareholders Agreements: A Comprehensive Guide for Startups
As a founder in the midst of forming your company, you will want to know how, when and why you should draw up a shareholders’ agreement. In this article, we look at what a shareholders’ agreement is, what it may contain and the advantages it can bring to your business.
What is a shareholder’s agreement?
A shareholders’ agreement is a contract entered into between the owners of a business in which they agree on the ways in which their business will be managed and operated.
When such a business is a private company limited by shares, the owners are shareholders. However, shareholders’ agreements are useful for anyone going into business with others, no matter the legal status of their company or business venture.
The shareholders’ agreement will usually complement the Articles of Association, which is a document outlining the specific rules for the management and organisation of the company. For more information about the Articles of Association, and any other documents relevant to setting up a business, click here.
Unlike the Articles of Association, there is no legal requirement for a company to draw up a shareholders’ agreement. However, it is often recommended, as it helps to anticipate the course of action in the event of a dispute, by establishing a point of agreement which the shareholders can refer back to when needed.
What does a shareholders’ agreement do?
A shareholders’ agreement acts as a tool for the wider governance of a company, provides an account of agreement between shareholders and prepares for the resolution of disputes where a deadlock occurs. The agreement generally sets out the following:
how the company will be organised and run;
how decisions about the company will be made and who will make them;
establishes the working relationships between the shareholders;
regulates the sale and ownership of shares in the company;
places protections for both majority and minority shareholder investments in the company;
sets out shareholder rights and obligations;
defines procedure regarding the appointment and dismissal of company directors.
Check out this checklist of common points to include in a shareholders’ agreement.
Advantages of laying out a shareholders’ agreement
There are key advantages of drawing up a shareholders’ agreement for your company.
Resolution of Disputes
A shareholder agreement can contain specific provisions about ways to deal with disputes, including the stage at which a dispute would be referred to mediation, or who an arbitrator for the company’s disputes may be.
Exhibits business stability
Drawing out a shareholders’ agreement for your company implies that you have planned ahead in the event of any dispute arising, and by drawing out a shareholders’ agreement, your company is better equipped to deal with conflicts smoothly. This is particularly important in the eyes of banks and creditors who may want to invest in your company - a shareholders’ agreement allows for more clarity into your business and usually contains exit clauses for lenders.
Provides a ‘default’ point of agreement
When a shareholder’s agreement is drawn up and signed at the early-stages of your business, it is easier to formalise and agree on the approach to be taken in the event that shareholders disagree or fall out. As a result, should a disagreement occur, parties can turn back to the shareholders’ agreement, which can provide a ‘default’ position or approach to take.
Protections for minority and majority shareholders
A shareholders’ agreement can contain protective provisions for minority shareholders, by setting aside certain decisions for the unanimous consent of all the shareholders, giving minority shareholders the right to prevent decisions going through if their outcome is disadvantageous.
When it comes to selling shares, “tag along” provisions can provide minority shareholders with the right to obtain the same price, terms and conditions for their shares as majority shareholders.
A “drag along” provision allows majority shareholders to “drag” the other minority shareholders into the sale of a company on the same terms.
Non-compete clauses
A shareholders’ agreement can set measures in order to protect shareholders and the company with regards to non-competition e.g. provisions excluding shareholders from starting a company in direct competition with your company while they are a shareholder.
Private document
The shareholders’ agreement is a private document. Generally, there is no obligation to file it with Companies House, allowing the contents to be confidential and the company to retain an element of privacy about the company’s management and shareholder relations.
Disadvantages of using a shareholders’ agreement compared to using only the articles of association
Changes to a shareholders’ agreement
While any changes to the articles of association usually require 75% of shareholders to agree, changes to the shareholders’ agreement generally require unanimous consent from all shareholders on the revised terms and conditions, in order for a new shareholders’ agreement to be drawn up.
When should a new shareholders’ agreement be drawn up?
A shareholders’ agreement can usually only be changed subject to unanimous agreement from the shareholders. A Deed of Variation of Contract i.e. a legal document used to change one or more clauses of an existing contract, or an entirely new shareholders’ agreement, will need to be set up and agreed upon by all shareholders.
A deed of variation, or a new shareholders’ agreement, should be written in the event that:
changes are made to your company’s business model;
changes are made to the way in which decisions are formed;
a shareholder/director wants to exit, resign, or is to be appointed;
a shareholder passes away;
a shareholder wants to sell their shares;
a shareholder wants to divide their share to others;
a shareholder lends money to the company.
Author: Gaia Freydefont -
Author: Gaia Freydefont -
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Stephensons Solicitors LLP, 'What is a shareholders' agreement?' (Shareholders' Agreements) <https://www.stephensons.co.uk/cms/document/Shareholders_agreements.pdf> accessed 15 August 2022
Stephensons Solicitors LLP, 'Checklist of common items to be covered in bespoke shareholders’ agreements/articles of association' (Shareholders' Agreements) <https://www.stephensons.co.uk/cms/document/Shareholders_agreements.pdf> accessed 15 August 2022
Harper James LLP, 'A guide to breaches of shareholder agreements' (30 June 2022) <https://harperjames.co.uk/article/breach-of-shareholder-agreements/> accessed 15 August 2022
Newtons Solicitors LLP, 'What is a Shareholder's Agreement and Do you Need One?' (15 July 2021) <https://www.newtons.co.uk/news/what-is-shareholders-agreement-do-you-need-one/> accessed 15 August 2022
Cleaver Fulton Rankin , 'Six reasons to have a Shareholders' Agreement' <https://cleaverfultonrankin.co.uk/legal-update/six-reasons-to-have-a-shareholders-agreement/> accessed 15 August 2022
Practical law commercial , 'Deed of variation of contract' (Thomson Reuters, Practical Law) <https://uk.practicallaw.thomsonreuters.com/3-505-5137?transitionType=Default&contextData=(sc.Default)&firstPage=true#:~:text=This%20is%20a%20deed%20for,may%20consent%20to%20the%20variations.&text=To%20access%20this%20resource%20and,obligation%20trial%20of%20Practical%20Law> accessed 15 August 2022
