Introduction to this document

Shareholders’ agreement

If you’re aiming to run a company with the minimum of fuss and to steer clear of disputes, then having a shareholders’ agreement in place will help you to achieve this. Our model agreement addresses the issues and provides appropriate solutions.

What is a shareholders’ agreement?

Basically, it’s a contract that’s preferably entered into by all the shareholders to set out and clarify their rights and obligations. They’re really important because they not only address operational issues, but also try and find ways of resolving problems. To be really effective, it’s preferable that all the shareholders of the company sign up. If this isn’t possible, the majority shareholders should definitely be party to the contract because they’re the only ones who have the power to take the major decisions which will affect everyone involved in the company. Remember, a shareholders’ contract is just like any other contract, i.e. it’s only enforceable by and against those who are a party to it. So, if you can’t get the “key players” in the company to participate, the agreement isn’t really going to be very effective.

What should it include?

                     Shareholder decisions. it should state all operational decisions that the shareholders are allowed to make, e.g. relating to expenditure, borrowing, hiring and firing of staff etc., and stipulate whether these decisions require a unanimous or majority vote.

                     Pre-emptive rights. These are the circumstances where the remaining shareholders are permitted to acquire the shares of a departing shareholder. The agreement sets out various events, such as death, bankruptcy, an employee or director resigning, which automatically “triggers” this procedure. The importance of this clause can’t be underestimated because it enables a company to ensure that if a director and/or employee also owns shares, if they’re forced to leave for any reason, then their shares must be offered for sale. This stops them having any interest in the company following their departure and so avoids a potentially acrimonious situation.

                     Agreeing a price for the shares. As well as setting out events that trigger the right of pre-emption being exercised, it’s essential that the agreement also provides a mechanism for the shares to be valued before they’re purchased. A decision needs to be made when discussing this aspect with other shareholders before the contract’s drawn up, whether the purchase price should be reduced in circumstances where the seller is a minority shareholder. This is because minority shares are normally valued lower.

                     Restrictive covenants. These should be included to stop former shareholders from harming the company’s business by seeking to trade with former customers or trying to poach current employees etc. Caution. Restrictive covenants can be tricky to enforce, particularly where they’re seen as too restrictive. To stand any chance of your restrictive covenant standing up in court, make sure you define a time period that isn’t too long and an area that’s not too wide.