Corporate & Commercial Solicitors, Emma Coey and Adele Patterson, explain what a Shareholders Agreement is, why it is important for the effective operation of a business, and how you can go about putting one in place.
What is a Shareholders Agreement?
Simply put, a Shareholders Agreement [“SHA”] is a contract between individuals. It is a private document, which is legally binding on each of the individuals who sign it and regulates the relationship between the individuals, and their relationship with the company. Quite often when a SHA is put in place, a bespoke set of Articles of Association will also be drafted and both would be adopted by the company at the same time. These two documents are of utmost importance with regard to how the Shareholders and Directors interact with each other and the company and are the two sets of documents relevant parties would look to in the event of a dispute.
A SHA is a private document, whereas the Articles of Association are a public document and is uploaded onto Companies House. It is therefore common for Shareholders to include the more private elements of their relationship and arrangements with each other in the SHA and keep the technical company rules in the Articles of Association.
Shareholders and Directors
It is important to understand from the outset in which capacity an individual is operating within your team and within your start-up business. While many start-up businesses have a Shareholder and Director being the same individual, it is important to note that these are two different roles and in the event of a dispute or an issue, the role will be important in determining what action(s) the relevant parties should take.
A Shareholder has an ownership stake in the business and receives a portion of the profit of the business in relation to their shareholding. The shares that a Shareholder holds are personal to them and you cannot force a Shareholder to give up their shares unless you have agreed the basis on which this can happen on your SHA or Articles of Association. This is a key reason why a SHA is important.
Typically, Shareholders are not involved in the day-to-day running of the business, unless they are also a Director. Shareholders generally have a vote in the fundamental aspects of the business, such as amending the Articles of Association, changing the company’s name, issuing new shares or appointing and removing Directors.
In contrast, a Director is an individual who manages the business on a day-to-day basis. They are responsible for operational and commercial decision-making. They are also responsible for ensuring that the company is managed in accordance with the Companies Act 2006 and managing the Company’s Articles of Association. Directors must comply with a number of statutory duties which are set out within the Companies Act. Generally, they are employed by the company and receive a salary.
Why do I need a Shareholder Agreement?
A SHA is vital for clarifying the roles and responsibilities of each of the Shareholders in a business. As a confidential document, the SHA can detail the specific arrangements agreed between individuals, rather than on the publically available Articles of Association. A SHA will usually cover the following matters:
- Ownership structure;
- Equity breakdown;
- Board composition;
- Decision making;
- Leaver provisions;
- Exit provisions on the transfer of shares;
- Intellectual Property;
- Minority Shareholder protection;
- Dispute Resolution and Deadlock;
- Dividend policy; and
- Restrictive covenants.
A further key matter that a SHA will deal with is decision-making. It is imperative to understand if you don’t have a SHA in place, decisions will be made by Shareholders dependent on the number of shares or the proportion of equity an individual holds in the company. In accordance with the Companies Act 2006, the vast majority of Shareholder decision-making can be made at a majority level i.e. over 50%. There are some very fundamental decisions such as amending the company’s Articles of Association or waiving statutory pre-emption rights that require 75% proportion vote, but overall, the majority rules. Therefore if you are a minority Shareholder in a company, it can be even more important that a SHA is implemented so that your interests are protected. Similarly, if you are a majority Shareholder but don’t hold the key 75% shareholding, it can be useful to have a SHA in place so that if there is a dispute with a minority Shareholder, you have a mechanism or a resolution process within the SHA which you can follow.
Shareholder Agreements can be relatively complicated documents and it is key that a business ensures its contents are correct and in line with its business needs. We would always recommend that you seek legal advice prior to drafting or implementing any legal documents, including Shareholder Agreements.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Corporate team at Cleaver Fulton Rankin for further advice or information.
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