Shareholders’ Agreements

What is a shareholders’ agreement?

A shareholders’ agreement is a contract between all or some of the company’s shareholders and occasionally the company.  The purpose of a shareholders’ agreement is to:

  • Regulate the relationship of the parties as shareholders
  • Give shareholders certain protections  they would not otherwise have under general company law

What does a shareholders’ agreement cover?

Shareholder agreements vary enormously. However, a typical shareholders’ agreement would be expected to cover the following:

  • A category of important “reserved matters” that could not be undertaken without the consent of all or a qualified majority of the shareholders
  • A dividend policy. For example, a minimum percentage of the company’s profits would be distributed each year by way of dividend
  • right to appoint a director to the board
  • Non-compete covenants
  • provision of financial information to the shareholders
  • Mechanisms for dealing with disputes
  • Restrictions on the ability of the company to issue new shares
  • Financing the company, both initially and in the future
  • Agreement as to any guarantees and indemnities given by a shareholder for the company’s obligations to banks and other third parties
  • Confidential obligations

New articles of association

The shareholders’ agreement is often accompanied with a new set of articles of association. Amongst other things, these would normally be expected to regulate the following:

  • If the Company has more than one class of share, the rights attached to each class of shares
  • Restrictions on the issue of new shares
  • The quorum for board and shareholder meetings
  • Pre-emption rights i.e. the rights of first refusal in the event a shareholder wishes to sell his shares
  • Mandatory transfer of shares by a shareholder in the event that shareholder:
    • dies
    • becomes bankrupt
    • ceases to be employed by the Company
    • becomes mentally incapable
  • The right to appoint directors.  Normally shareholders holding a majority of the shares in the company would be able to appoint and remove the directors.  Accordingly, the articles may provide that each shareholder would be entitled to appoint a director for so long as he holds a minimum percentage of the shares in issue.

Getting in touch

To find out more about our Shareholders’ Agreements service, please contact Hitendra Patel on 01295 204108 or email hpatel@se-law.co.uk

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