A frequent concern for businesses is how to fairly regulate dealings between shareholders. Equal shareholders risk reaching an impasse in relation to decisions. Whilst there is some statutory protection for minority shareholders, enforcements of those rights requires an application to court with all of the costs and un-certainty that inevitably accompany this. Unhappiness or uncertainty about management issues can cause friction between shareholders and distract attention from the primary purpose of the company.
A shareholders agreement is a contract between Company Shareholders who are a party to it and often the company itself. The purpose of these agreements includes:
- To give (often minority) shareholders rights and protection that they would not otherwise enjoy
- To place the Company itself under a duty to recognise and uphold the rights of specified shareholders.
- To reflect and maintain as confidential certain agreements achieved between shareholders (unlike the company articles which are open to public inspection)
It is worth pointing out that a limited company is a legal entity in its own right and should be a party to the agreement to ensure its enforceability.
Different shareholders may have conflicting interests and should take independent advice on any draft agreement.
A shareholders agreement may seek to regulate a number of issues between shareholders including:-
- Binding shareholders to vote in a specific way on particular matters.
- To nominate agreed bankers, auditors and professional advisers
- To provide a policy as to declaring dividends.
- To restrict or govern dealings in shares – or to, for example, impose option agreements permitting shareholders an option to purchase shares being sold by another shareholder – instead of a sale to an outsider
- Restrictive covenants – for example, not to trade in competition or entice away customers
- To impose obligations of confidentiality.
- Put limits on how far the Company can commit itself to contracts without consulting the shareholder.
- We strongly recommend businesses trading as a limited company to enter shareholders agreements often provide clarity and disputes between shareholders (and be particularly difficult to unravel).
We are able to advise as to the preparation of Shareholders Agreement or in relation to disputes between shareholders.