In order to mitigate risks and safeguard the interests of shareholders in your UK business, it is crucial to have a well-drafted shareholders agreement in place. This legal document provides clarity on decision-making processes, admission of new shareholders, and the resolution of various scenarios such as a shareholder’s departure, desire to sell, transfer, or even death.
Without a shareholders agreement, these matters may need to be resolved through time-consuming and expensive negotiations, arbitration, or even litigation. To help you create your own customized shareholders agreement template, it is important to consider certain factors that are specific to your business.
Before You Begin It’s essential to recognize that each business and its shareholders are unique, with different motivations and circumstances. Therefore, there is no “one size fits all” shareholders agreement template. To ensure the inclusion of appropriate clauses tailored to your needs, it is advisable to consult with a commercial law firm like ours. We can assist new shareholders, selling shareholders, and those looking to invest in a business, offering valuable legal expertise to make informed decisions.
Why Shareholders Agreements Are Vital A shareholders agreement is a crucial legal document that establishes the terms and conditions under which shareholders will operate. It plays a significant role in preventing disagreements and misunderstandings in the future. Here are key elements that should be addressed in your shareholders agreement:
- Statement of Purpose and Objectives: Clearly define the company’s purpose and objectives to ensure all shareholders work toward the same goal, such as facilitating business growth.
- Roles and Responsibilities: Outline the specific roles and responsibilities of each shareholder to avoid confusion and establish clear lines of accountability.
- Shareholder Departure: Establish a process for handling a shareholder’s departure, providing guidelines for the transfer or sale of their shares and the distribution of new shares.
By incorporating these essential elements, you can create a robust and comprehensive shareholders agreement.
What to Include in Your Shareholders Agreement Template
Consider including the following key elements:
- Corporation and Shareholders: Provide the names and addresses of the corporation and shareholders involved.
- Share Ownership: Specify the type and number of shares owned by each shareholder, along with provisions for share transfer upon a shareholder’s death.
- Other Share Details: Address how shares are valued in cases where shareholders are restricted from transferring them.
- Corporate Management: Define shareholders’ involvement in business operations, finances, capital, and assets.
- Agreement Duration: Establish the start and end dates of the shareholders agreement.
- Capital Requirements: Determine how additional capital should be distributed when needed.
- Shareholder Disputes: Anticipate potential disputes and include clauses to address them in the shareholders agreement.
- Dividend Policy: Outline the procedures for dividend payments.
- Protecting Minority Shareholders: Include clauses that safeguard minority shareholders or give majority shareholders greater decision-making power.
- Dispute Resolution: Specify mechanisms for resolving disputes and assigning decision-making authority.
- Share Transactions: Define the process for buying, selling, transferring, and issuing shares, including approval rights.
- Rights and Responsibilities of Directors and Employee Shareholders: Address the rights and responsibilities of shareholders who also hold positions as company directors or employees.
- Decision-Making Processes: Establish guidelines for making key business decisions.
- Privacy and Confidentiality: Ensure the protection of sensitive information within the agreement.
- Potential Shareholder Disputes: Address potential conflicts that may arise due to changing business priorities and shareholder expectations.
Share Transfer and Business Direction
Addressing share transfers is vital, as they can occur unintentionally (e.g., upon a shareholder’s death) or intentionally (e.g., due to personal gain or disputes). Shareholders can restrict share transfers by establishing transfer rights and powers.
Additionally, the shareholders agreement should outline the process for making significant business direction changes. As businesses evolve over time, adjustments may be made to the goods or services offered or the way the business operates. Riskier changes, such as engaging in business with a company majority-owned by one shareholder, should be managed with shareholder consent.
Changes to Shareholders’ Roles
The agreement should also address changes in shareholders’ levels of involvement. Directors manage the day-to-day operations of the business and report to the shareholders. The agreement should clearly define the responsibilities and limitations of a director’s position. It should also specify what happens when a shareholder wishes to become more or less involved in the company’s management.
Shareholders and Lenders
If a shareholder is also a lender providing both equity and financing to the business, it is crucial to consider how changes in their circumstances will be handled. The shareholders agreement should outline the procedures in such situations.
Exiting the Business
The agreement should provide provisions for future events, such as the sale of the company or the buyout of certain shareholders. It should also specify the obligations of shareholders if the company is wound up.
To address the risk of former shareholders establishing competing businesses, the agreement should include provisions that detail the actions to be taken in such cases.
Drafting a Shareholders Agreement
While it is possible to write your own shareholders agreement using templates available online, it is advisable to seek assistance from a commercial solicitor with in-depth knowledge of UK company law. They can guide you through the process, ensuring that the agreement protects your rights and aligns with legal requirements.
Shareholders Agreement vs. Articles of Association
It is important to distinguish a shareholders agreement from the articles of association. The articles of association are legal obligations published as a public document with Companies House. They serve as written rules governing the operation of the company and are agreed upon by shareholders, guarantors, directors, and the company secretary.
On the other hand, a shareholders agreement is a private contract that focuses on the relationship between company shareholders. It is not publicly disclosed and primarily aims to enhance cooperation among shareholders.
Business Plan vs. Shareholders Agreement
While a business plan outlines the business strategy and objectives, a shareholders agreement specifically addresses the rights and responsibilities of shareholders. These two documents serve different purposes but can complement each other in guiding the business’s overall direction.
Legally Binding Nature of Shareholders Agreements
A shareholders agreement is a legally binding contract among the shareholders of a company. It establishes the rights, duties, and obligations of each shareholder, as well as the rules for decision-making and profit distribution. Having a shareholders agreement in place helps prevent misunderstandings and conflicts in the future. To ensure your rights are adequately protected, it is essential to seek legal advice from a specialist commercial solicitor during the creation or review of a shareholders agreement.
Breach of a Shareholders Agreement
Breach of a shareholders agreement may result in liability for damages. The court may also order specific performance of the contract, forcing compliance with its terms. Injunctions can be issued to prevent actions that breach the agreement. If you find yourself in breach of a shareholders agreement, it is crucial to seek legal advice promptly to avoid further legal action and potential costs.
Forced Sale of Shares
Under certain circumstances, a shareholder can be compelled to sell their shares. Breaching the terms of the shareholders agreement or the occurrence of specific events, such as the sale of the company or a shareholder’s death, may require the sale of shares. Drag-along rights can enable a majority shareholder to force a minority shareholder to participate in the sale of the company.
Consult an Expert for Your Shareholders Agreement
While it is possible to write your own shareholders agreement using templates, it is important to acknowledge the risks involved without a deep understanding of UK company law.