A Company’s constitution consists of its articles of association and, where there is more than one shareholder, a shareholders’ agreement. These documents set out the rules governing the affairs of the Company.
There can sometimes be an overlap between the two documents, but a shareholders’ agreement often goes further, providing greater protection for shareholders and their investments.
A shareholders’ agreement, unlike a Company’s articles, is a private document, and need not be registered at Companies House. This makes it more appropriate for dealing with matters of a confidential or sensitive nature.
Typical terms of a shareholders’ agreement
Whilst a shareholders’ agreement should be tailored to the specific circumstances and requirements of the Company and its shareholders, typical provisions found in many agreements include:
- a statement of the nature, and permitted perimeters, of the Company’s business;
- the contributions to be made by the shareholders to the Company;
- the number and identity of directors of the Company;
- the decision making process adopted by the Company and whether shareholder consent should be required for any particular reserved matters;
- the Company’s dividend policy;
- any exit strategy for shareholders;
- any restrictions on admitting new shareholders, or issuing new shares;
- any restrictions or obligations on shareholders in connection with the transfer of shares;
- any restrictions on shareholders from competing with the Company, or poaching any customers or staff from the Company
- the protocols and procedures for resolving deadlocks and disputes between the shareholders; and
- a shareholder’s access to certain financial information.
Potential pitfalls without a shareholders’ agreement – don’t get caught out
Where there is no agreement in place, shareholders will be subject to the rights and restrictions contained in the Company’s articles and those afforded by statute. This can lead to some unintended consequences, including:
- shareholders who are employees retaining their shares in the Company after ceasing to be employed by the Company;
- minority shareholders’ rights being limited to those prescribed by statute (which are few and often difficult and costly to enforce);
- majority shareholders being blocked from selling their Company by its minority shareholders;
- third party shareholders, where there are no restrictions on transfers in the articles;
- weaker protection of Company confidential information shared with shareholders; and
- deadlock in decision making, giving rise to the Company being wound-up.
A robust shareholders’ agreement, and suitable articles of association, can together provide certainty for shareholders as regards their rights and obligations as shareholders, and also the tools for resolving potential disputes without interrupting the Company’s trading activities. Some of the matters typically covered in an agreement can be heavily negotiated, and are often easier to agree at the beginning of the relationship, than further down the line when relations may become strained.
For further information about this, please contact Corporate and Commercial Solicitor Nick Mayles. Nick is a highly experienced transactional corporate and commercial lawyer. If we can assist with any questions you may have in relation to your business, please get in touch by emailing firstname.lastname@example.org or call 01206 574431.