A Shareholders’ Agreement – why is it important to have one in place?

Year Published: 2016

Any company with more than one shareholder should consider putting in place a shareholders’ agreement. Paul Tyrer a Solicitor in our Corporate team explains why it is important to have one in place.

Key reasons why it is important to have a shareholders’ agreement in place

  1. A shareholders’ agreement is a very flexible document which, unlike the Company’s articles of association, is a private contract between the individual shareholders and the Company and as
    Paul Tyrer, Corporate Solicitor, SAS Daniels LLP

    Paul Tyrer, Corporate Solicitor

    such does not need to be kept on the public record at Companies House. It can therefore include terms which may be considered as confidential or commercially sensitive.

  2. Many shareholders wrongly assume that there are restrictions under company law on shareholders selling or transferring their shares to third parties. This is not generally the case and one of the most critical provisions for any agreement is to include a restriction which stops a shareholder from transferring their shares without first offering them to the other shareholders. There can also be a number of deemed transfer events included such as death, mental incapacity or bankruptcy.
  1. Shareholders’ agreements can also contain a provision that forces an employee to sell their shares in the event that they cease employment with the company. Without such a clause it is possible that an errant employee can still hold onto any shares which can be at best a nuisance or more seriously block certain key decisions from being made. Sometimes a distinction is made between so called ‘good leavers’ and ‘bad leavers’; with good leavers receiving fair value for their shares and bad leavers receiving a lower or nominal value.
  1. As a minority shareholder you may wish to see certain protections incorporating into a shareholders’ agreement. These can include a list of certain operational decisions which must only take place with the unanimous consent of all or a majority of the shareholders. This prevents key decisions being made without reference to the minority shareholders.
  1. In a company which has shareholders holding an equal number of shares there is obviously the potential for deadlock when it comes to decision making. A shareholders’ agreement can include provisions that deal with what happens when a deadlock situation arises. These can include a simple casting vote, appointment of an independent expert or, in more extreme cases, liquidation of the company.
  1. ‘Drag and Tag’ – these provisions are so-called because they can compel a minority shareholder to be ‘dragged along’ in the event that a majority receives an offer for the sale of their shares (typically on a trade sale). The minority must then sell at the same price and on the same terms as accepted by the majority.
  1. It is not uncommon for companies to have different classes of shareholder. The agreement can set out in detail the various rights attaching to each type of share, for example, whether they attract the right to vote, to a dividend payment and so on.

The above points are not intended to provide an exhaustive summary and it is vital that any such agreement is tailored to your individual circumstances.

For further advice on shareholders’ agreements or any other corporate matter, please contact Paul Tyrer in our Corporate team on 0844 3915835.

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