Own Less Than Half Of Your Company? Maybe You Need A Shareholders Agreement

11th February 2019

Own Less Than Half Of Your Company? Maybe You Need A Shareholders Agreement

A Shareholders Agreement is a private contract between the shareholders of a company. It is not a replacement for the company’s Articles of Association, but an addition to it. While the Articles provide the company’s governing framework, and give detailed instructions on how the company is to be run, many minority shareholders want to have a Shareholders Agreement as well.

A Shareholders Agreement brings many benefits to minority shareholders, who are in a vulnerable position compared to a majority shareholder. A company’s Articles can theoretically be amended merely by a 75% majority vote of shareholders, which could leave minority shareholders exposed. By contrast, a Shareholders Agreement is a private contract, and can therefore be altered only if all parties to it agree.

What goes in a Shareholders Agreement? It can have provisions which help guarantee a minority shareholder’s rights, by for instance stating that a minority shareholder must be appointed to a particular role, such as auditor. It can also restrict the majority shareholder’s ability to sell their shares. It can specify that the shares of a shareholder who dies must be sold to the other shareholders. This would avoid the administrative inconvenience of the outgoing shareholder’s family inheriting a stake in the company.

A Shareholders Agreement can even govern matters that do not relate to the company’s constitution. For example, it might specify that a shareholder who is also a director of the company cannot work for a competitor for a certain period of time after leaving.

The real value of a Shareholders Agreement is in helping resolve disputes, which can otherwise lead to deadlock or expensive court battles. A well-drafted Shareholders Agreement will set out the mechanism to value and sell one or more shareholdings, if the relationship between shareholders breaks down. It might specify how to value the shares of the outgoing shareholder, and state if the process differs according to whether that person is also an employee of the company, or is selling their shares due to retirement, or they have been dismissed for misconduct.

Notes

For more information about resolving disputes between shareholders, click here.