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