Shareholder agreements

Since it is perfectly possible to start a business without a shareholder agreement that is what many businesses do. The company will have a set of Articles of Association setting out some basic guidelines as to how the company should be run. We find a lot of people wondering whether they need anything else.

Here are some frequently asked questions relating to shareholder agreements

Why should we get a shareholder agreement?

Many people setting up a new business will do so using a company structure. Whilst purchasing a company “off-the-shelf” is relatively straightforward, even standard companies can operate differently.

The running of a company is governed by Company law (mostly set out in the Companies Act 2006 (“the Act”)). However, the document which sets out how the company should be run on a day-to-day basis is called the Articles of Association. The most simple form of “default” Articles in an off-the-shelf company are the “Model Articles” designed at the same time as the Act. However, some company formation agents have their favourite amendments to these which these also include in the Articles they provide.

Even so, the Articles you are likely to get are usually fairly general. More importantly, many owner/managers do not understand the eventualities that they do and the areas they do not cover. Once these things can be explained, the owners often decide they would like to introduce some changes. The most common ways in which this might be done are

  • To make changes to the Articles; or
  • To draft a shareholders’ agreement.

We recommend a combination of the two.

Do we need a shareholders’ agreement?

Some things to think about

  • Is the current value of the company sufficiently large for the owners to argue about it if they fell out?
  • Is the value likely to increase significantly over the near future?
  • Do you wish to introduce new shareholders to an existing business?
  • Are there just two shareholders holding different numbers of shares?
  • Are there some shareholders who do not work in the business?
  • Would you be happy if the other shareholders sold their shares to someone you didn’t know or left their shares to someone else when they died?
  • Have the shareholders made substantially different contributions to the business?
  • Does one shareholder hold (or control) a majority of the shares?
  • Would you like clarity on how you will resolve disputes?
  • Would you prefer that a shareholder who resigned his employment should return his shares?
  • Would you be unhappy if one of the other shareholders set up in competition whilst a shareholder or shortly after s/he left?
  • As a shareholder do you want to make sure that you can always be a director?
  • Single Purpose Vehicle
  • Have you informally agreed, or do you wish to agree and record any special or unusual arrangements?
  • Do you want to pay yourselves different levels of dividend?
  • As a majority shareholder, do you want to be able to force the other shareholders to join in if you want to sell to a third party?
  • If you are a minority shareholder do you want to ensure that the buyer acquires your shares if the majority shareholder decides to sell to a third party?

If the answer to any one or more of the above points is yes, then you may wish to consider obtaining advice about making changes to the Articles of Association or entering into a Shareholder agreement, or both.

Do I need to get independent advice on a shareholder agreement?

Anyone who is acquiring (or being given) shares in a business would be well-advised to obtain independent advice on how that investment will be protected. This is commonly done by means of a shareholders agreement.

How can I find out what rights I have in my company?

See shareholder disputes

What is shareholder deadlock?

The term is used to describe a situation in which two “factions” within a company have equal voting rights but different views on the way forward. In the simplest possible situation, this might be two shareholders owning 50% of the shares each.

In many smaller businesses, the shareholders will have set up the company without giving thought to the implications. In some joint ventures the structure is deliberate.

In the absence of agreement between the parties, the company may have to be put into liquidation. However, that is unlikely to be a commercial outcome for either party. It would be much better to negotiate or mediate a resolution.

Occasionally, the Articles, or, more likely, the shareholder agreement will include a method for resolving deadlock e.g. to allow either party to make an offer to either buy the other party’s shares or to sell his own shares to the other party at a proposed price. This gives the other party the option to buy or sell. It tends to ensure that any offer made is a fair one.

Examples of recent work

  • Drafting shareholders agreement and subsequent amendments in respect of healthcare organisation with multiple shareholders;
  • Drafting shareholder agreement for professional services firm with four unequal partners;
  • Initial advice to shareholder on his shareholder rights in the absence of a shareholders agreement in a science company;
  • Advice to shareholders on setting up new business between investor and shareholder/employee in respect of new restaurant business;
  • Advice to two prospective shareholders on how best to protect their relationship with each other using a shareholder agreement;
  • Drafting shareholder agreement between two equal shareholders in Furniture manufacturing and distribution company;
  • Drafting shareholder agreements between five unequal partners in IT company;
  • Drafting new shareholder agreement to introduce new business partner and protect original founder's interests.