Shareholders' and Investment Agreements
What is a Shareholders' Agreement?
A shareholders' agreement is a legal document between the shareholders of a company that outlines their rights, responsibilities, and obligations. It serves as a private contract governing the relationship among the shareholders themselves and their relationship with the company. There are lots of reasons why a business might need one, and it serves several functions.
For example, the agreement specifies the percentage of company shares owned by each shareholder and may detail the initial investments they made. It lays out how the company will be governed, including the voting rights of shareholders, the decision-making process, and the structure and powers of the board of directors.
A shareholders' agreement will also include terms for buying and selling shares, such as restrictions on share transfers and rights of first refusal. It might specify conditions under which a shareholder can sell their shares, who can buy them, and how the price should be determined. This can include leaver provisions, which detail what happens if a shareholder wants to exit the company, dies, or becomes incapacitated.
One of the key purposes is to anticipate and avoid disputes. The document may outline procedures for resolving disputes among shareholders - or between shareholders and the company - by, for example, mandating a type of alternative dispute resolution such as mediation or arbitration. This aims to avoid costly and public legal battles.
The Agreement may also include a mechanism to remove a deadlock between two equal shareholders who are unable to agree on any particular matter.
Given all of these functions, a shareholders' agreement may be crucial to prevent conflict and keep a business running smoothly. By clearly defining every contractual obligation of all the shareholders and other parties, a written agreement can offer legal protection and guidance for resolving disputes.
What Are Shareholders' Agreements Used For?
Typically, a shareholders' agreement will regulate the rights and obligations of a company's shareholders. It sits 'on top' of the company's articles of association and will normally prevail over them. Since it is outside the scope of registration requirements under the Companies Act, it has the advantage of being private and will often contain detailed provisions as to rights of transfer of shares, regulation of the business itself, business plan, reserved or veto rights and any other matters for which the shareholders wish to provide. Since it is binding on the shareholders as a contract, its flexibility makes it a useful tool not only in start-up situations but for ongoing businesses.
Where different businesses or individuals have pooled their contributions for a particular purpose, a shareholders' agreement will contain project-specific provisions as a joint venture agreement.
A considerable advantage of a shareholders' agreement is that it can help to prevent complaints of unfair prejudice, since it can provide a right of involvement in management and appropriate exit routes. The three main instances in which a shareholders' agreement is most often implemented are as follows:
- Quasi Partnerships - these arise when a small number of owners also share the management of a company. The result is that principles of partnership law and a requirement of fair conduct overlay the strict principles of company law. The exclusion of anyone from participating management may give rise to a claim of unfair prejudice unless a shareholders' agreement is in place.
- Investment Agreements - these will govern the rights and obligations of investors and other shareholders in respect of the initial investment, the ongoing business of the company and any exits of the investors or other shareholders.
- Joint Ventures - when two companies have an idea for a new business, they may wish to conduct that new business through a separate new company for which each of their companies will be a shareholder. A joint venture agreement will detail the relationship between the two parties, state the roles and responsibilities that will be required of each company during the joint venture and offer details of any financial rewards to each of the shareholding companies. A typical example would be that one shareholder may supply property while the other shareholder brings a workforce and relevant know-how.
What should be in a shareholders' agreement?
A well-crafted shareholders' agreement sets out provisions for all the shareholders of a company. Drafting a shareholders’ agreement carefully in conjunction with an expert solicitor will provide clarity and can help to prevent future disputes. It should cover every party's legal obligations, enshrine shareholders' rights and provide a mechanism for resolving shareholder disputes.
Here are some of the essential elements that you should consider including in a shareholders' agreement:
- Clearly identify who the shareholders are and detail the structure of the company.
- Describe the different classes of shares and their respective rights. Provide rules for issuing new shares and restrictions on transferring shares, including pre-emption rights, tag-along and drag-along rights.
- Outline the composition of the Board of Directors, explain how directors are appointed, and list their duties.
- Determine when and how often shareholder meetings will take place. Detail how they may be called, what the voting procedures will be and any quorum requirements that will apply.
- Explain what decisions require shareholder approval, and specify if any will need a majority, or unanimous consent.
- Provide a dividend policy with information on how profits and dividends are to be distributed, and guidelines for financial reports that will be given to shareholders.
- Include clauses that protect minority interests from being overridden by the majority.
- Specify procedures for handling disputes among shareholders or between shareholders and management.
- Detail the conditions under which shares may be bought or sold, with specific details about what should happen in the event of death, disability, or voluntary/involuntary exit. You may also refer to the methods or formulas to be used for determining the value of shares in various circumstances.
- Add clauses designed to prevent shareholders from competing with the company or disclosing confidential information.
- Plan for the transition of management and ownership in case of retirement or unforeseen events.
- Consider specifying procedures for amending the agreement in the future.
Each shareholders' agreement will be unique and should be tailored to the specific needs and circumstances of the company and its shareholders
Need help right away?
Contact Clough & Willis
The team at Clough & Willis supports businesses throughout the UK in negotiating and drafting shareholders' agreements, and resolving shareholder disputes. Whether you are a minority shareholder, a majority shareholder or another interested party, you should seek legal advice before you sign any agreement. If you are drafting the agreement yourself, legal advice from our expert commercial solicitors can help to make sure it is enforceable, comprehensive and fair.
For legal advice relating to a shareholders' agreement, contact the experts at Clough & Willis Solicitors today. Call us on 0800 083 0815 or fill out an to request a call back at your convenience.
Latest News
Need more information?
Clough & Willis Solicitors is a highly respected and forward-thinking full-service law firm, delivering high-quality legal advice on a wide range of personal and commercial matters. From our offices in Bolton and Bury, we provide friendly, approachable and comprehensive legal guidance to individuals and business clients across England and Wales.
For more information about any of our services, please complete the online form or call 0800 083 0815 to speak with a member of our friendly team.
