A shareholders agreement is a simply a contract between the shareholders of a private company, dealing with how the shareholders intend to manage the company and regulating each of the shareholder’s roles and responsibilities.
A shareholders agreement is particularly useful where the directors and shareholders of a private company are the same people, as company law assumes that all companies are run by a board of directors who are not necessarily shareholders of the company.
Unlike the company’s articles of association which are available to the public via Companies House, a shareholders’ agreement is a private document, enforceable in the same way as any other contract.
Matters that would typically be dealt with in a shareholders’ agreement include:
- What happens if a shareholders leaves/dies/becomes ill
- Shareholders’ rights to appoint directors
- Voting rights
- Dividend policy
- Transfer of shares
- Valuing shares in the event of a transfer/sale of those shares
- Restrictive covenants
- Drag and tag along rights on the sale of the company
- Minority shareholder protection
Although some companies may simply rely on the goodwill and trust that exists between the shareholders this can often break down, in the event of any falling out between the shareholders or if any unexpected event occurs, particularly if any shareholder wishes to leave and be paid out for his shareholding before the other shareholders would have expected him to and as such can end in conflict. Without a shareholders’ agreement in place the shareholders may find that the general company law position does not deal with matters in the way that they would have intended.
Shareholders Agreements therefore aid in managing and minimising the risk of internal conflict between management, by defining and outlining the responsibilities of the parties involved through a formal written contract.
Drafting a shareholders’ agreement is also beneficial as it encourages discussion between the shareholders allowing them to see where their expectations for the business differ and to raise any potential areas of concern that may otherwise have been overlooked, until a problem actually occurs.