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Shareholders agreements

A carefully thought out shareholders' agreement can have major benefits for the company and its shareholders.
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It’s an agreement made between some or all of the shareholders of a company which controls the relationship between one another. This is separate from the constitutional documents of the company.

The constitutional documents of the company, also known as the articles of association, manage the separate relationship that exists between the shareholders and the company. Therefore, shareholders’ agreements must be used in addition to the company’s constitutional documents.

The terms of shareholders’ agreements are usually confidential while the company’s constitutional documents are open for public inspection at Companies House, meaning that any member of the public can examine them.

Shareholders’ agreements protect minority shareholders’ rights. Without an agreement, majority shareholders can make decisions that aren’t in the minority shareholders’ interests. To make changes to shareholders’ agreements, all the shareholders involved must agree, but to make changes to the company’s constitutional documents only a 75% majority must agree. This means that shareholders’ agreements provide minority shareholders with more protection. They also ensure that some key matters require all the shareholders to agree (eg changing the business of the company).

Shareholders agreements provide a greater element of flexibility as they are usually easier than the company’s constitutional documents to manage, change or bring to an end.

Shareholders’ agreements often include sections requiring all the shareholders to vote for or against particular key matters. These issues will often include:

  • the business activities of the company
  • mergers and acquisitions involving the company
  • the employment terms of the directors
  • lending or borrowing over certain sums and
  • the dividend policy of the company

The shareholders agreement will often contain a right of pre-emption (or first right to buy) for existing shareholders over the shares of a shareholder leaving the company. This means that leaving shareholders must first offer their shares to the remaining shareholders.

Shareholders’ agreements may include a process for resolving disputes. Examples include referring the issue to a third party expert or arbitrator, or what’s known as a buy-out method where one shareholder buys out the shares of another at a price that’s fixed in the agreement. If a dispute cannot be settled, shareholders’ agreements can contain “deadlock provisions” which allow the parties to vote to wind up the company.

Shareholders' agreements often contain provisions providing for the automatic offer of the shares of one shareholder to the others in certain circumstances, including events of default, incapacity and death.

Clauses that protect the competitive interests of the company restrict shareholders from being involved in competitive activities. Examples include restrictive covenants which prevent the shareholders from being involved in competing businesses and/or from poaching key employees from the company. 

The Shareholders agreement is an agreement between the shareholders in a private limited company (LTD). It details how they are governed, and what their relationship is to the company and to each other.

The shareholders agreement is not the same as a partnership agreement, as a partnership has its own business structure with different rules and regulations. A partnership is made up of individuals.

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