MAKE YOUR FREE Shareholders' agreement

A shareholders' agreement is a contract between the owners of a company that defines their roles, rights and obligations as shareholders in the company. A shareholders' agreement specifies the appointment of managing shareholders, creates rules for appointing and terminating company officers and sets out requirements for board and shareholder meetings, shareholder duties, entitlements and rights to information and dividends.

Every shareholder wants to maximise the value of their investment, so why not supplement the company's articles by using this shareholder's agreement to prevent conflict and protect minority shareholders. This straightforward shareholders' agreement used between some or all of your company shareholders can be the best way to ensure stability and continuity. 

Unlike the company's articles, the shareholders' agreement is confidential. It covers key issues such as company administration, the company's officers, new share issues, day-to-day management, decision-making and leaving shareholders. Shareholders should consider putting a shareholders' agreement in place as soon as possible after company formation or once the first shares have been issued.

Use this shareholders' agreement:

• when you and other individuals are shareholders in a private limited company
• to supplement the company's articles with provisions relating to shareholders' powers and entitlements
• to ensure the additional provisions are kept confidential in a private contract
• to make it easier to change provisions in the future without having to amend the articles

This shareholders' agreement template covers:

• the issue of new shares to incoming shareholders
• company officers
• requirements for board and shareholders meetings
• unanimous shareholder approval for reserved matters of key importance
• shareholders' duties, entitlements and management of the company
• rights of first refusal for shareholders to buy the shares of shareholders leaving the company
• shareholders' rights to information and dividends
• shareholders leaving, including restrictions on competing with the company after leaving

Shareholders' agreements protect an individual's interest in a company and create rules for how a business will deal with any disputes between shareholders. Use this shareholder contract when you are forming a business with more than one investor and you want to clarify the rules for running the company and how decisions are to be made.

The issued share capital is the total of a company's shares that are held by shareholders. A company can, at any time, issue new shares, unless a limit is set in the company's articles. Companies registered before 1 October 2009 will still be subject to an authorised capital figure, that is, the maximum amount of share capital a company is authorised to issue to shareholders until their memorandum and Articles of Association are amended.

The nominal (or par) value of the shares is the value chosen by the initial shareholders when the company is incorporated. The nominal value is determined by the company itself and remains unchanged over time, for example, a share may have a nominal value of 1p, 10p, £1 or any other sum in any currency.

Dividends are profits distributed to shareholders according to the number of shares they hold in the company. The company must have enough distributable profits in order to pay dividends to its shareholders. Profits of the company can't be declared as distributable if any loans from any shareholders are outstanding.

Shareholder agreements usually specify the payment period within which dividends are to be issued and the percentage of distributable profits in each financial year. Alternatively, the directors can decide the amount to be recommended as a dividend. A more detailed dividend distribution policy is usually contained in the company's articles of association.

A new shareholder may prefer to lend money to the company rather than buying shares. It is sensible to record this in a Loan agreement, which will include whether interest is payable on the loan and whether the loan is secured against the company's assets.

A compulsory transfer is when a shareholder must sell their shares to the remaining members. A 'compulsory transfer' may be triggered by one or more of these events when a shareholder:

• is an employee of the company and resigns
• is a director of the company and resigns
• commits a material breach of the shareholders' agreement and it is not remedied

In such circumstances, the price of the shares will be the fair value or nominal value (the price of the share when it was issued) - whichever is less. Fair value is estimated based on analysis of the company's financial information such as market demand, market price and in accordance with any company's liabilities or debts.

Reserved matters are matters in which the company must first obtain consent from a special majority (which could be unanimity) of the shareholders before making any decisions. Examples of reserved matters include:

• changes to the company's articles
• changes to the nature and scope of the business
• borrowing or obtaining other finance
• payment or declaration of additional dividends

Valuation of private shares is often a common occurrence to settle shareholder disputes when shareholders are seeking to exit the business, sell part of their shares, for inheritance or many other reasons. Unlike public companies whose share prices are widely available, shareholders of private companies have to use a variety of methods to determine the value of their shares. Usually, it's done by auditors or an independent accounting firm.

A shareholders' agreement is a private agreement between the shareholders. A company's articles of association are a public document, and companies are required by law to adhere to them. Both of the documents regulate the actions of the company and can overlap. You must therefore make sure that they are consistent.

Ask a lawyer for:

• a company limited by guarantee
• shareholders who are companies not individuals
• a company that is incorporated outside England, Wales or Scotland
• a company that has more than one class of share
• a company whose articles of association are not the 'Model Articles' (ie the default articles for private limited companies which you will be automatically assigned when you incorporate a company at Companies House)

This agreement is governed by the law of England and Wales or the law of Scotland.