Shareholder’s Agreements – What are they?

What are they?

Shareholder agreements regulate the relationship between shareholders

They can assist with the situation where a shareholder dies, becomes bankrupt or simply wishes to sell their shares on the open market.

There be a “right of first refusal” between the shareholders.

This means that there is a set procedure for offer and acceptance to the other shareholders first.

They can agree the value of the shares, with a referral to independent person if necessary.  

It might be necessary for you to agree between yourselves in the agreement that the articles of association will be varied to make sure that directors accept a transfer of shares.

It can also anticipate the costly and upsetting risk of a minority shareholders dispute.

Therefore it can try to reduce any risk of this by allowing for agreed exit clauses, non – solicitation clauses, and non – compete clauses.

Why would I need a Shareholder’s Agreement?

A Shareholder’s Agreement is a contract between two or more shareholders of a Company.

It can normally be sued upon in the English Courts, under contract law.

They often describe the shareholdings at the outset of the Company, as well as capital contributions and the declaration of dividend income.

They can note arrangements that govern who is to have the day to day running of the Company, perhaps where somebody is to take an advisory role as an investor.

They can also regulate decision making upon items of extraordinary expenditure, which may preferably need full ratification, from all members.

It sits apart from the Articles of Association and will need to be drafted in conjunction with the same.   For this reason it will also have an “agreement to prevail”, so it does not conflict.  

There is often a buy – out clause in a shareholders agreement that benefits some or all shareholders, should one or the other(s) wish to leave.

He must offer his shares first to the other for purchase at market value under a procedure before offering them to the market.

This triggers a procedure by giving an offer notice and then completion should occur not less than a certain time period after the date of the seller’s Notice.  

The timescale is often set at the outset, and agreed between the parties. If the Purchasing Shareholder fails to purchase within that timeframe then the Seller can sell on the open market within an agreed period, but often only at the agreed Price.

The Price is set by valuation by an independent auditor (or an auditor of the Company), at market value, with any disputes regulated by Arbitration (if preferred).

The advantage of shareholders agreements is that they are flexible and can include the contractual provisions you think you may need, to give your start-up business an agreement to work from.

There are often provisions relating to “Non-competition” after one party has left.

This is often a point of reference, but for a non-competition clause to be effective, it depends on the circumstances, and the relative bargaining powers of the parties.    

There are often some “boiler plate” clauses, which are quite standard.

These include :-

  • Stopping somebody else having the benefit of the agreement ,
  • Deleting a clause in the future that is agreed surplus to requirements,
  • Termination of the Shareholder’s Agreement by agreement between the shareholders,
  • Termination upon death, bankruptcy, and mental incapacity of one of the shareholders.

In essence they make litigation less likely, and give you the peace of mind to run your business, with a fully considered business plan, in place at the outset.

Where can I have one drafted?

Should you feel the need to take any advice on the drafting of a Shareholder’s Agreement, then please do not hesitate to contact our David Formby, Solicitor, who would be more than happy to assist.  

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