If your company has more than one shareholder, it is strongly recommended that you have a shareholder agreement. You can find a template here.
A shareholder agreement is a contract regulating the relationship between your company’s shareholders, setting out their rights and responsibilities. In essence, it governs how your company is run.
There is no requirement for your company to be a separate party to the shareholder agreement. If you prefer, it can simply be an agreement between your shareholders. However, it is common to include the company as a party. This is because, as a party to the agreement, the company and its board will be legally bound by the agreement and will have the right to enforce the terms of the agreement if they are broken by a shareholder.
Why you need a shareholder agreement
A shareholder agreement is in place principally to protect your company. It includes important provisions which set out things like:
- How and when shares can be issued or transferred;
- Who is responsible for approving shareholder decisions on certain important matters;
- How shareholders should resolve deadlocks or disputes;
- When minority shareholders can be required to sell their shares;
- The composition and chair of your company’s board, and information about its business plan; and
- How and when your company can be sold.
Benefits of a shareholder agreement
Benefits to your company
- Reduce risk of disputes: a shareholder agreement assists the smooth running of your company and minimises the risk of disputes between shareholders.
- Confidentiality: this type of contract can ensure that commercially sensitive information about your company and the relationship between its shareholders is not available to the public.
- Control over shareholders: provisions within the agreement can control shareholders for a time after they have sold their shares, for instance by minimising their ability to set up a competing business (known as restrictive covenants).
- Facilitating a sale of your company: the agreement can include a clause to force minority shareholders to sell their shares if a sufficient number of other shareholders wish to accept a potential buyer’s offer (known as a drag-along right).
Benefits to the shareholders
- Protection for minority shareholders: the agreement can protect shareholders who are not on the company board or who hold minority stakes, for example by requiring particular decisions to have the prior approval of all shareholders who hold more than a certain percentage of shares (known as veto rights).
- Enforcement of shareholder rights: a shareholder agreement makes it easier for a shareholder to enforce their rights compared with other routes (eg enforcing rights written into your articles of association), as it is a direct contract between the shareholders of a company.
- Requirement of unanimous consent to change: unless the agreement contains specific provisions stating otherwise, it can only be changed by unanimous agreement of the shareholders who have signed up to it, so everyone gets peace of mind.
Consequences of not having a shareholder agreement
Without a shareholder agreement in place, you may face disagreements between your shareholders on matters such as:
- When your board should get shareholders’ approval;
- Whether any important decisions, such as issuing more shares that dilute the power of existing shareholders or purchasing another business, need consent from all or nearly all shareholders; or
- Whether any shareholder can transfer their shares as they think fit or whether they must first offer them to the other shareholders.
Without a shareholder agreement, unless a matter specifically requires shareholder approval under company law or under the terms of your articles of association, it will be decided at board level by default. This can be undesirable for certain key or sensitive decisions.
You should also bear in mind that if ownership of your company is shared evenly (for instance a 50:50 jointly owned company), there is a chance of deadlock occurring if you don’t have a shareholder agreement. A shareholder agreement seeks to pre-empt this by clearly allocating responsibility for decisions on certain key matters, and including a mechanism to resolve any deadlock that might occur.
Create your own
If you want to enter into a shareholder agreement, you can use our document assembly tool to create your own fully customised agreement.
Our shareholders’ agreement toolkit will guide you through the steps necessary to enter into the shareholder agreement and obtain all the necessary changes and approvals.
The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply.
Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.