What Should A Shareholders Agreement Include?
A shareholder agreement will set out the contractual shareholder terms and conditions by which shareholders, the company and (where appropriate) its directors will be bound.
A shareholder agreement provides focus and clarity to all shareholders. With a shareholders’ agreement in place, all parties will better understand their rights and obligations and how the business plan will be executed.
Some of these will be shareholder obligations as to how they must act or behave in connection with their monetary investment, time involvement and operation of the business, and others will be restrictions on what the shareholders and/or the company can or cannot do without appropriate shareholder approvals.
We are experts at preparing shareholders’ agreements at different stages of a company’s life cycle, such as when a company start-up is established, as part of an equity investment round, at the time of an MBO or MBI or following the exit of one or more shareholders.
When a shareholders’ agreement is signed, new articles of association should be adopted simultaneously to implement the arrangements in the shareholder agreement.
A company’s articles of association are a public document (filed at Companies House), so some of the more personal or specific terms (such as post-termination restrictions) are better suited to the shareholders’ agreement, which will remain private and confidential between the parties.
A cross-option agreement (incorporating put options and call options over shares) is needed when individual shareholders take out life and/or critical illness policies to cover the value of their shareholding interest in a company.
Cross-option agreements typically give surviving shareholders and a deceased shareholder’s personal representatives corresponding rights to require the sale and purchase of shares following death, often funded through life insurance policies written into trust.
The proceeds of such a policy are normally written into trust so that they can be used by surviving shareholders to buy a deceased shareholder’s shares.
Our Approach to Shareholders Agreements
We provide a creative and can-do shareholders’ agreement advisory service. We guide you on the legal and commercial arrangements you need to consider for your shareholders’ agreement, and then we prepare and finalise the completion of your shareholder agreement, new articles of association and (if appropriate) cross-option agreement.
When necessary, we draw on the expertise of our Commercial Property, Employment, Commercial, Dispute Resolution and Private Client teams.
We provide clear advice to ensure you understand the complete process and efficiently prepare a shareholders’ agreement, new articles and association and (if appropriate) a cross option, each tailored to your specific needs.
We will provide clear, transparent costs quoted at the outset and undertake all work for you according to our Promise.
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Shareholder Agreement FAQs
What is a Shareholders’ Agreement?
A shareholders’ agreement is an agreement between all the shareholders of a company.
It is an essential and integral document to any shareholder relationship, which allows shareholders to regulate their relationship with each other, the company and its directors.
It provides clarity and direction for all by setting out the framework for how the company will be governed and operated. It also helps to mitigate costly and potentially damaging shareholder disputes, should they arise in the future.
Whilst a company’s standard constitution and the Companies Act 2006 provide some protection for shareholders, it is very limited, and relying on it alone could have a random or unpredictable outcome.
Similarly, Table A of the Companies Act 1985 and the Model Articles within the Companies Act 2006 import default provisions; however, not all of these provisions will be suitable and compatible with the owners’ wishes.
For example, standard articles do not generally include pre-emption rights on share transfers or permit a compulsory transfer of shares held by a shareholder if such shareholder breaches a shareholders’ agreement or the articles of association.
Who Should Enter into a Shareholders’ Agreement?
The circumstances in which you may need to consider a shareholders’ agreement with your fellow shareholders are:
- If your company has two or more shareholders
- If you are setting up a new company or starting a new business with others
- If you are buying a company with others in a new company, whether as part of an MBI, MBO or otherwise
- If you are acquiring or subscribing for shares as an investment in an existing private trading company (whether new shares or from another shareholder)
- If you are selling or transferring shares to others in your company whilst retaining a shareholding
- A shareholders’ agreement will ensure that your investment, interest and, where appropriate, control of your business is protected, and the business can be run transparently and profitably
- Shareholders’ agreements can also provide important minority shareholder protections, including information rights, veto rights and board representation provisions where appropriate.
Whilst a company’s standard constitution and the Companies Act 2006 provide some protection for shareholders, it is very limited, and relying on it alone could have a random or unpredictable outcome. Similarly, Table A of the Companies Act 1985 and the Model Articles within the Companies Act 2006 import default provisions; however, not all of these provisions will be suitable or compatible with the owners’ wishes.
Even if you have already established your business, there is still time to put the necessary protections in place to ensure that shareholders are protected in the future. You can look to enter into a suitable shareholders’ agreement and articles of association at any time.
It is also important to review such arrangements regularly (especially when shareholdings are varied) to ensure they remain suitable.
What Kind of Scenarios Does a Shareholders’ Agreement Regulate?
Below are several scenario questions that can be easily addressed and answered in a shareholders’ agreement. These scenarios would potentially cause major concern and disruption to you and your business without a shareholders’ agreement.
- What happens if a shareholder wishes to sell their shares to a third party whom you do not know or trust or to someone who wishes to change the direction of your business?
- What happens if most shareholders wish to sell their shares, but a minority shareholder does not?
- What happens if the shareholders fall out or have a disagreement?
- What happens if a shareholder dies?
- What happens if a shareholder wishes to set up a competing business?
- Do you want a veto on certain decisions if you do not have day-to-day involvement in your company?
A shareholders’ agreement will provide clarity and direction for all by setting out the framework for how your company will be governed and operated and how issues or disputes such as these may be resolved.
What are Articles of Association or a Company’s “Articles”?
A company’s articles of association or ‘articles’ are its constitution that regulates its internal affairs and its relationship with its officers and shareholders
Articles should be carefully prepared to reflect all provisions of a shareholders agreement, share subscription agreement and investment agreement regarding how a company will be operated.
All UK companies have articles that are publicly accessible at the Registrar of Companies.
Articles take one of three forms:
- Model Articles
- Model Articles modified as desired
- Bespoke Articles
Model articles are the default statutory articles in the Companies Act 2006. They import limited default provisions such as shareholder liability, director appointments and proceedings, share rights, and shareholder decisions. In most cases where there are two or more shareholders, they will not be suitable.
Articles should normally be extended beyond the limited default Model Articles by either amending the Model Articles or adopting bespoke Articles.
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