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Shareholder Agreements – What Are They?

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Shareholder_Agreement.jpgAs the name suggests, a shareholders’ agreement is one which is entered into between the shareholders of a company. It provides protection in the areas of ownership and sets out the procedures to be taken in relation to certain company related decisions. 

While a number of the issues addressed within the shareholders’ agreement may alternatively be covered by the company’s Articles of Association, it will often be preferable to address such issues in the private shareholders’ agreement as this is a confidential document, unlike the articles which are publicly accessible. 

The following key provisions would usually be covered within the shareholders’ agreement.

Voting Rights

The Companies Act contains provisions for certain decisions which are required to be passed by a majority vote e.g. alterations to a company’s Articles of Association or a change of name.

However, other significant decisions which include, amongst others, company financing or borrowing; strategic direction; acquisitions; business disposals etc. fall outside the confines of the Companies Act and will typically be left to the board of directors, unless otherwise provided for.

In such instances, a suitably drafted shareholders’ agreement can provide protection by requiring such decisions to be approved by a certain specified majority vote.

Related: The Core Principles Of Good Corporate Governance

Board Of Directors

The responsibility for the day-to-day running of a company’s business will typically rest with the management team, with strategic oversight and direction provided by the board of directors. For smaller companies, the board and management team would typically be one and the same.

Whatever the size of the business and its related operations, a suitably drafted shareholders’ agreement would usually include provisions relating to the make-up of the board of directors; provisions for non-executive directors etc. In certain specific cases, a shareholders’ agreement will often be drafted to  entitle shareholders with a specific shareholding, or other relevant individuals, to make appointments to the board of directors.

Related: Stewardship Code – An Overview Of Shareholders Corporate Duties

Share Transfers

A shareholders’ agreement may be of benefit in imposing certain restrictions on the transfer of company shares. Matters such as retaining control, or the wishes of a controlling shareholder, may be of relevance. Prevention of a sale of shares to third parties or provisions for situations such as the death or divorce of shareholders will also usually be considerations where an agreement is being drafted.

Related: What Is A Rights issue?

Dividends

A shareholders agreement can also privately address the company’s dividend policy. Amongst others, considerations such as ensuring the continuing liquidity of the company and ensuring the balance between the needs of the company and the individual shareholders will be of particular importance.

Related: Shareholder Loans & Capital Maintenance For Asset-Holding Companies

Disputes

One further benefit of a shareholders’ agreement will be its ability, where suitably drafted, to provide an effective mechanism for the resolution of any disputes which may arise amongst the shareholders. A pre-determined framework addressing such situations would be set out in the agreement, which would assist in enabling such conflicts to be resolved in a confidential and efficient manner.

Related: Tips For Managing Commercial Disputes

Professional Advice Recommended

The benefit and applications of shareholder agreements are extensive and such agreements should always be professionally drafted to meet the specific needs and circumstances of individual companies and their shareholders.

Shareholders' Meetings -  Understanding The Facts

 

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