What is a shareholders agreement?

A shareholders agreement sets out further powers, rights and obligations that the owners have to each other and the company, beyond those that already exist under law or through the articles of association.

The Companies Act 2006 provides the over-arching rules under which all companies must operate including the rights and obligations of shareholders.

The articles of association set out how an individual company is run by the directors and the shareholders. This document records how the owners control and manage the business between themselves, providing the basic business structure. Many of the matters covered are procedures, such as how meetings are called. Companies are required to file their articles at the registrar (Companies House) and anyone can inspect them.

Further to that joint framework of the CA 2006 and a company's articles, using a shareholders agreement, there is enormous scope to decide who may do what, and under what circumstances.

Why do I need a shareholders agreement?

Having a shareholders agreement in place is essential for both majority and minority owners.

The reason is not one of compliance with the law, but for protection of your personal interests - even if you own more than half of the total share capital.

Minority shareholders are likely to want greater control over the decisions that influence the value of their holding than the law gives them by default.

Majority owners may wish to make sure that minority shareholders cannot sell their shares easily to anyone who may have different ideas about the direction the company should take.

What should a shareholders agreement cover?

A shareholders agreement deals with issues of control:

  • how decisions are made
  • who has certain additional rights to those under statute law
  • how shares are issued to incoming shareholders
  • shareholders' duties and entitlements
  • rights to information and dividends
  • what happens when a shareholder sells his or her shares

Every agreement will balance different shareholder interests in different ways, including:

  • protecting minority owners who otherwise do not have a great influence on decisions
  • protecting a founder entrepreneur or lender who has a small shareholding but a large interest in the company
  • setting out who can be a board member and therefore influence decisions taken by the directors that are not put to the shareholders
  • controlling the appointment and termination of directors
  • providing options for exit provisions

The type of business you carry out is less important to the contents of the document.

It is very easy to add industry-specific provisions to your agreement, but they still tend to boil down to questions of power or policy.

Although you can include strategy and objectives, it is a mistake to fill your shareholder agreement with matters that should best be covered in your business plan - a level even lower down the structure.

Specific matters covered in all our shareholders agreement templates

Clarification of decision making

Executive directors are employees, accountable to the company and its shareholders. Where directors are also stock holders, as is so often the case, a director may be able to make decisions that benefit himself as a shareholder, but which are not in the interests of his fellow owners.

A shareholders agreement fulfils the role of an operating agreement. It allows you to set the limits of director power, and clarify what matters should be referred to the share holders for a decision. Doing so helps to ensure that owners are kept informed, and that the most important decisions are made by them as a group, and not by the directors.

The converse applies too. An agreement can also define what decisions a shareholder-director may take freely, without requiring a members meeting, allowing confident, decisive action when it is needed.

Rebalance shareholder power on issues that are important to you

By default, voting power is in proportion to shares held. Your agreement can over-ride this basis, allowing you to specify the rules as to how decisions on subjects important to you are made. Minority shareholders can be given more say on certain issues.

For example, you might give every shareholder an equal vote on decisions relating to appointment of directors regardless of proportionate ownership. In some circumstances you might decide that each shareholder may be a director or appoint some other person to be a director. Another burning issue could be sale to a third party.

Decisions on different subjects could be decided in different ways depending on the importance of each subject to each shareholder. You can go as far as to completely separate ownership and control: useful if some shareholders may not have experience or knowledge to allow them to make effective decisions. For family businesses and companies where some shareholders hold shares only as an investment, this is likely to be a useful feature.

Protect the value of your investment

A written shareholders agreement can help prevent other owners reducing the value of your investment by their actions. It can do this by setting out:

  • requirements for disclosure and for approval for certain actions such as large asset purchases
  • how assets, time and expertise brought into the business should be valued on sale

Guard your privacy relating to management

Some aspects of management can be set out in the company's articles of association. However, unlike the articles, your shareholders agreement is a private document that you don't have to file with Companies House or make publicly available. Only you and other owners will know the arrangements you have. How your company is managed therefore remains confidential.

Reduce the likelihood and cost of disputes

Disputes between owners and other stakeholders are expensive and can be disruptive and detrimental to the on-going operation of the business.

Many matters are likely to be discussed at each annual general meeting of the members. Some will require immediate action and therefore will be voted on. Others will come under strategic or contingency planning, such as under what circumstances owners agree to a merger if approached. The likelihood is that over a period of time, consensus might be forgotten on any single issue if it wasn't something that required a vote. Discussing these matters at the outset when starting a new business or when a new shareholder arrives and then recording them in writing limits the scope for a single member to scupper the plans of the other stockholders by claiming that he or she has never been involved in such decisions.

In other words, having a shareholders agreement written in plain English means that shareholders are less likely to dispute what was agreed when the document was signed.

The inclusion of a dispute resolution procedure (which could be arbitration or mediation) within our templates makes resolving any that do occur easier.

Retain control in difficult situations

A shareholders agreement allows you to plan for the worst so as to keep the business going. Within it, you can set out what would happen should certain events occur, whether the sudden departure of a key founder or the withdrawal of a source of funding.

Writing one, together with the other owners, is a process that allows you collectively to evaulate the risks to each of you. It can help with business planning.

Practical matters covered

Format and layout

Like all Net Lawman documents, our shareholder agreement templates are in Microsoft Word format. The main advantage of a Word document is that you are not restricted in what you can edit - you really can create an agreement that fits your business. Of course, as your business grows, you can also revisit the document and amend it as necessary. Features within Word such as Track Changes allow you to collaborate with other owners easily.

The law in these shareholders agreements

The law relating to these documents is both corporate law and commercial contract law. Our guidance notes make it clear which paragraphs you can safely edit or delete, and which we recommend leaving as drawn.

However, your shareholders agreement is always subject to the articles of association. If you are putting one in place, it is usually a good time also to review and update your articles to make sure that there are no conflicts between the two documents.

Templates in plain English

Our templates are written in plain English by a solicitor who specialises in commercial drafting and who has practical experience of resolving shareholder disputes.

As a former director of numerous private and publicly listed companies, he includes practical, “real world” considerations. These agreements are comprehensive in the cover of legal and management issues.

Special provisions covered in our shareholders agreements

Vesting provisions

For various reasons many start-ups want vesting provisions. That is, a shareholder can cash out his equity only after an agreed period has passed, or when his performance is satisfactory or when a certain event occurs.

In the US, the terms under which vesting will happen are usually placed in the shareholders agreement. At Net Lawman, we believe that for technical legal reasons, it is better to place them in other documents.

We recommend either:

  • that you have a set of articles of associaton that allow for multiple classes of share, one of which has limited or no rights until an event passes on which the class becomes convertible to a class that has full rights, or

  • that you incentivise indivudual employees or contractors using a share option agreement that links the ability to buy shares at a preferential price to that individual's performance in some way (such as length of tenure in the company, or achievement of a milestone for which he or she is involved in reaching).

How shares are valued

Agreeing a methodology for the valuation of private shares is important and can be done within the agreement.

A shareholder may wish to exit the business, or sell part of their shares to generate cash. A dispute may be most easily solved by one party buying out another.

While share prices for public companies can easily be estimated from recent trades on the stock market, those for private companies are more difficult to ascertain.

All these shareholder agreement templates include provision for valuation of the shares of a departing shareholder by reference to a valuation based on your instructions to an accountant. The valuation depends on the parameters used, so your instructions are critical. For example, you might choose to use a multiple of average EBITDA over a certain number of years, or a multiple of average net assets.

We have provided a comprehensive wording which you can edit according to the deal you wish to strike with a selling shareholder.

Tag along, drag along and right of first refusal

These provisions are included in our shareholders agreement for an institutional investor because it is in that situation where they are most sought after, but the presence of an institutional investor is not a pre-requisite for using them.

Tag along and drag along provisions are essential if you anticipate a sell out to which not all shareholders might agree.

They provide that:

  • no shareholder can sell a majority shareholding unless the same deal is also offered to the minority.

  • if the majority want to sell and the buyer has offered the same deal to the minority, the minority must accept and sell.

Right of first refusal can help protect from an unwanted outsider buying into the business if one of the other shareholders decides to sell.

A professional investor will nearly always require these provisions so that his exit route is clear.

Choice of limited company

The limited liability that a incorporated business structure affords is an enormous advantage for startups, a small business or a nonprofit over a general partnership or sole proprietorship because as its own legal entity, it reduces personal liability for losses. However, that should not be confused with removing responsibility or obligation entirely.

Directors have specific responsibilities under law.

What are reserved matters?

Reserved matters are decisions that can only be made having obtained consent from a special majority (shareholders who hold more than 75% of the voting shares, or possibly unanimity).

For example, reserved matters might include:

  • changes to the articles of association
  • changes to the nature and scope of the business or a key segment
  • borrowing or lending sums greater than a certain amount
  • declaration and payment of additional dividends

Some reserved matters are specified under the CA 2006, and others can be written into a shareholders agreement.

Why choose Net Lawman

Immediate delivery of the document template by e-mail after checkout
DocX file format compatible with all popular PC & Mac word processing software. We can convert into other formats for you
Use of plain English makes our documents easy to edit and understand
Detailed guidance notes explain the purpose of each paragraph and how to edit
Review service available - a Net Lawman lawyer can check your edited document
Full money back guarantee if the document isn't right for you
 
Create a shareholders agreement for your company online
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Price: £49.00 ex VAT (£58.80 inc VAT)

Suitable for use in: All legal jurisdictions of the UK incl. England & Wales and Scotland

When you use our online service, our software creates a shareholders agreement for you as soon as you have finished answering a questionnaire about how the owners intend for the company to be run.

The questionnaire takes about 25 minutes to complete.

We save your answers every time you move to a new page, so if you want to take a break at any point, you can return later without having to start from the beginning.

When you have completed the questionnaire, you can choose for your agreement to be e-mailed to you immediately in Microsoft Word format (compatible with many different word processors), or you can arrange for an experienced lawyer to review your document so that you have confidence that it is legally sound.

If you choose our review service, we aim to check your template and return it to you within 72 hours.

Suitability for your company

This service can produce shareholders agreements for private limited companies registered anywhere in the UK where any of the following apply:

  • the company is newly formed
  • shareholders of an existing business want to change or record their agreement
  • one or more shareholders require additional protection, for example a minority shareholder who is also a significant lender
  • the business is owned by family members only

This questionnaire allows you to choose options covering:

  • process and rights to appoint and remove directors
  • duties of directors, and rights to change those duties
  • decision making on important matters
  • dividend policy
  • exit provisions and transfer of shares, including drag along and tag along rights, rights of preference and rights of first offer
  • key man insurance
  • use of shareholders assets within the business
  • strong reporting requirements
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