Shareholder Agreements

Whether you have 2 shareholders or 20, a shareholders agreement should be a key document, creating a balanced relationship between shareholders and setting out rules, restrictions and future planning, providing clarity and protection for shareholders and anticipate the future ways the company may change and the strategic decisions which are likely to be needed .

Our lawyers draft, advise on, update and review shareholder contracts, including for joint ventures, advising whether you have an equal, majority or minority holding.

An agreement should cover key issues such as valuation of shares in the event of an exit, the terms of any dividend policy which is to be implemented and a process and specifics for resolution of disputes between shareholders.

Why you need a shareholder agreement

Many sme owners do not realise that for the most part, companies are self governing. Current English company law is light on rights and rules and a company's standard articles of association leave many important areas out. A minority shareholder, without a shareholders' agreement will generally have little control or say in running the company and can be outvoted on hugely important decisions, including being diluted or having the company's rules altered further to benefit the majority shareholder. There is little legal protection for minority shareholders under the Companies Act.

A good shareholder agreement ought to include :-

• key veto rights for minority shareholders.

• control on finance, ability to borrow, and ensuring that up-to-date, clear financial information is available for all shareholders.

• rules on the issue of any new shares, including pre-emption rights or preference shares.

• director powers and restrictions on powers.

• exit of shareholders including different rules and valuation depending on whether the exiting shareholder is a "good leaver" or "bad leaver".

• drag along and/or tag along rights where the business may be sold.

• what happens to shares on the death, serious illness, bankruptcy or where a shareholder is found guilty of a criminal offence.

• dispute resolution procedures which may include a mechanism for buy out, especially where a company has 50:50 shareholders.

• dividend policy.

• restrictive covenants so that departing shareholders who have been very involved in running the business cannot set up in competition or assist a competitor.

In addition, provisions can be included to ensure minority shareholders receive the same return on their investment as majority shareholders. This is in the event of a sale to a third party.

Shareholder Agreement vs Articles of Association

In comparison to Articles of Association a shareholder's agreement has several benefits. The shareholders agreement is a private document, and no changes can be made without a unanimous agreement between all the shareholders.

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It is essential to have experienced Solicitors to draft a document based on an assessment of your business needs. This is also to support and protect your shareholders now and in the future.