Essential elements every shareholders’ agreement must include

What is a shareholders’ agreement?

A shareholders’ agreement is a critical document for any business with multiple shareholders as it outlines their rights, responsibilities and obligations. When drafted carefully, it can help to prevent disputes by clarifying how certain matters should be dealt with in advance.

It’s best to do this when the relationship is good and shareholders are working with a common purpose. At the point when the agreement is scrutinised, it is common that a relationship has broken down or an incident such as a long-term illness or death has occurred. It’s far easier to prepare for such matters proactively than to deal with their consequences reactively.

A shareholders’ agreement can be made between all or some of the shareholders and in certain circumstances, it can include the company itself. It can be limited, for example to include the holders of shares with rights to vote.

It should cover:

• the shareholders’ rights and duties;
• provisions relating to the sale and transfer of the shares;
• provisions that protect the shareholders and the company;
• how the company operates, including how the board is constituted, who is entitled to be a director and how meetings of the directors and shareholders are called and managed; and
• what constitutes a critical decision and how those decisions are made by shareholders, whether by a certain majority or unanimously.

Although it’s a legally binding contract, the parties can agree to change the terms at a later date.

10 steps to a well-drafted shareholders’ agreement

Given the imperative nature of a shareholders’ agreement, it is important to ensure that it comprehensively addresses all points of concern. Following these tried-and-tested steps with a corporate law solicitor will help you draft an effective agreement that protects your business’s interests and minimises risk.

1. Define the purpose and goals of the agreement

Ensuring that all shareholders have a shared vision and understanding of the business objectives is essential in achieving harmonious decision-making.

2. Clarify shareholder roles and responsibilities

Specifying shareholders’ duties, decision-making authority and individual or shared responsibilities will help prevent misunderstandings and conflicts.

3. Detail share capital and ownership structure

It’s important to clarify the different classes of shares and the number of shares issued. You should also cover the process for issuing new shares, transferring existing shares and any restrictions on share transfers.

4. Include provisions for decision-making

These should cover decisions that require unanimous consent, a majority vote or a specific quorum. Common examples include decisions involving major business transactions, changes to the company’s constitution and approval of annual budgets.

If the company is deadlocked – i.e., it has two shareholders with the same number of shares – it is important to include a mechanism to refer to in the event that a serious dispute arises.

5. Identify dispute resolution mechanisms

Disputes are inevitable in any business, so it is crucial to have the right mechanisms in place to resolve them as and when they arise. Include provisions for mediation, arbitration or other dispute resolution methods to help address conflicts efficiently and avoid lengthy and costly litigation.

6. Set out proposals to raise additional finance

Include personal guarantees to third party funders to be given by the shareholders and the repayment terms applicable to any outstanding director’s loans.

7. Include exit strategies and buy-sell provisions

The shareholders’ agreement should cover scenarios such as the sale of shares, shareholder exits and procedures in the event of the death, disability or retirement of a shareholder. Pre-agreed mechanisms for share valuation and sale should also be included to help avoid disputes during such transition periods.

8. Protect minority shareholders

Include provisions that could require minority shareholders’ consent for certain major decisions. You should also offer pre-emptive rights to maintain their proportional ownership in the event of new share issues.

9. Address confidentiality and non-compete clauses

This will help protect the company’s sensitive information and discourage shareholders from engaging in competitive activities (restrictive covenants). This is important to safeguard the company’s interests and maintain trust amongst the shareholders.

10. Review and update

A shareholders’ agreement should not be static. It should reflect any changes within the company where necessary. Periodic reviews can help ensure that the agreement remains relevant and accurately captures the share structure, ownership and details of the current shareholders.

How can we help?

Our team at LCF Law has extensive experience of advising on shareholders’ agreements that are compliant with current laws and adequately protect the interests of all shareholders.

Call Corporate Law Partner Cathy Cook on 0113 238 4042 or email ku.oc1728471493.fcl@1728471493koocc1728471493.

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