Shareholders’ Agreements

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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:
  • 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.