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What is a Shareholders’ Agreement?

A Shareholders’ Agreement governs the relationship between the owners of a company and is supplemental to the constitutional documents. Putting a Shareholders’ Agreement in place is not only a useful way to record the roles and responsibilities of the shareholders but it can also be helpful if a dispute arises between the shareholders.

Companies are governed by, amongst other things, its Articles of Association. The Articles are one of its main constitutional documents and regulate the internal affairs and management of the company and, possibly, its activities. This includes procedures for board meetings and dividend entitlement.

The voting rights of shareholders in a limited company will ordinarily depend on the number of shares that they hold. A majority shareholding of over 50% will give control over the company and its general day to day running. 75% or more of the voting rights are required for certain decisions. These rights may not always be appropriate or desirable and shareholders may agree that a minority holder is to have greater rights than would otherwise be the case. Alternatively, there may be a potential for ‘deadlock’ where two shareholders hold 50% of the shares each. A Shareholders’ Agreement can address each of these situations.

There are a number of reasons why shareholders might wish to supplement the constitutional documents, such as:

  1. privacy – constitutional documents are made available for public inspection whilst Shareholders’ Agreements are generally private between the involved parties;

  2. to deal with possible ‘deadlocks’;

  3. dispute resolution – the shareholders may agree on an alternative means of resolving disputes without resorting to the courts, eg arbitration;

  4. protection for minority shareholders – additional protection for minority shareholders may be included in a Shareholders’ Agreement;

  5. protection for the company – by preventing shareholders from having competing interests.

No two Shareholders’ Agreements are likely to be the same.

However, such agreements may contain the following matters:

  1. the reorganisation of the company and the obligations of each of the shareholders including any powers to appoint a director(s) to the Board;

  2. provisions for protection of minority shareholders;

  3. management and reporting obligations of the company;

  4. restrictive undertakings for the shareholders;

  5. provisions for resolving disputes between the shareholders (might include deadlock provisions);

  6. the nature and amount of initial contributions;

  7. the nature of the business;

  8. designation of responsibilities and key roles.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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