Shareholders Agreements for Private Companies

Notwithstanding competing financial demands on a start-up or growing business, a key investment for a private limited company should always be a shareholders' agreement. This is because standard articles of association only cover a limited number of common legal and practical matters, which can create risk and disputes as companies develop and things change.

Why work with us

Some of the benefits our working with us include:

• We have seen and dealt with a great number of shareholder agreements over the years. This gives us extensive experience to draw on when advising you.
• We act for both large and smaller businesses. Our experience allows us to understand what is reasonable in your circumstances and what goals are likely to be achievable.
• We are highly experienced in drafting, reviewing and advising on shareholder agreements. Our lawyers are highly practical and cost effective, ensuring you get what you need to protect your interests and provide clarity.

Main benefits of a shareholders' agreement

For the vast majority of private limited companies, there are many good reasons to have a shareholder agreement, including :

• A shareholders' agreement is a key way to regulate how the company will be run, set out the rights and obligations of shareholders, impose appropriate restrictions and establish agreed processes for important decisions.
• A shareholders' agreement is private whereas the articles of association are a public document. In some circumstances, amending the articles may provide an alternative or additional way of dealing with some matters.
• A shareholders' agreement can include restrictions on the activities of shareholders after they sell or transfer their shares.. This is particularly important because, in many small businesses, shareholders are also directors and sometimes employees.
• Regulating the relationship between shareholders and directors. Directors have day-to-day authority for running the company, and a shareholder agreement can set out matters requiring shareholder consent or place agreed limits on how certain decisions are made.
• Planning for the potential exit of shareholders, the introduction of new investors and circumstances where some shareholders may want to sell the company.
• Helping to prevent and manage shareholder disputes.

Please do call us if you have a question or need your shareholders' agreement reviewed. We are always happy to provide a scope and estimate.

Key clauses in a shareholders agreement

Different companies will have different reasons for implementing a shareholders' agreement. Based on past experience, we see many of the following clauses included in shareholder agreements:

• Who will do what – in many small private companies the shareholders work in the business. Establishing roles, time commitments and whether the shareholders are intended to have an active role is essential.
• Managing the compulsory transfer of shares – for example, where a shareholder is an employee and they are dismissed, good and bad leaver clauses can determine what happens to their shares.
• Drag-along rights – whereby minority shareholders are required to participate in a sale where the majority shareholders want to sell the business, thus preventing them from blocking any sale of the business.
• Bolstering the rights of minority shareholders –there are many areas of risk for minority shareholders if basic rights are not enhanced. For example, without appropriate protections, a majority shareholder may be able to approve the issue of new shares, potentially diluting existing shareholders.
• Veto rights over the issue of new shares generally and/or new classes of shares.
• Put and call options.
• Good leaver and bad leaver provisions.
• A policy for paying dividends from available profits.
• Controlling dilution.
• Restrictions and limitations on directors – limiting the ability of a shareholder who is also a director to make unilateral decisions that commit the company to borrowing, employing staff or entering into important contracts.
• Rights to information – giving shareholders specific rights to information, such as management accounts and other data, to provide ongoing visibility of how the company is doing.
• Illness, death, incapacity, criminal conviction or bankruptcy – setting out what happens to shares in these circumstances.
• Mechanism and procedures for resolving shareholder disputes – this will often include a procedure whereby, if shareholders cannot agree, there is a mechanism for determining an appropriate outcome, which may include a valuation mechanism and buyout provisions.
• Resolving deadlock – If there are two shareholders and each owns 50% of the shares, what happens if they disagree and end up in deadlock? A shareholder agreement can include a mechanism for resolving the deadlock and, where appropriate, providing an exit route.

Using shareholder agreements to manage directors

You may find it difficult to remove directors if appropriate arrangements have not been considered in advance. A shareholders' agreement can include provisions dealing with the appointment and removal of directors and establish agreed procedures for dealing with these situations.

The statutory procedure under the Companies Act 2006 will still need to be followed where applicable. In practice, if a director is not performing, delay in removing them can be commercially damaging to the business.

Speak to our experienced team today. We take a practical, proactive approach, giving you clear advice and the protection you need without unnecessary complexity.