A well-drafted shareholders’ agreement can protect your shareholders from common problems, in particular those which affect the sale or transfer of their shares. We can help you to decide whether you need a shareholders’ agreement, and you can use our document assembly tool to create your own fully-customised agreement in a few clicks.
Watch this video to find out how to create your own shareholders’ agreement:
Shareholders’ agreement: an introduction
What is a shareholders’ agreement?
A shareholders’ agreement is a contract between the shareholders of a company. It regulates the relationship between the shareholders and governs how your company is run.
Exactly what terms your agreement contains will depend on your company’s circumstances, the number of shareholders you have, and their respective bargaining positions (which is likely to be dictated by the number of shares they hold).
Common provisions include:
frequency of board meetings and process for calling them and circulating papers;
how your company issues more shares in the future;
any specific matters or decisions where shareholders’ prior approval is needed, and what percentage shareholding is enough to approve it;
- confidentiality obligations to protect information about your business;
whether shareholders can transfer their shares freely or have to offer them to other shareholders first;
requirements for a manager or director shareholder to sell their shares upon leaving the company;
circumstances when majority shareholders can force minority shareholders to sell, and when your minority shareholders can require their shares to be sold;
restrictions on shareholders being involved in competing businesses after they leave; and
the process for any future sale of your business.
Do I need a shareholders’ agreement?
If your company has more than one shareholder, although it is not mandatory, it is strongly recommended that you enter into an agreement setting out the rights and responsibilities of your shareholders as part of your company’s internal management.
Without such an 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 which dilute the power of existing shareholders or purchasing another business, need consent from all or nearly all shareholders;
if any shareholder can transfer their shares as they think fit without first offering them to the other shareholders; and
when your business is sold and how you go about this.
If your company has adopted the model articles and has no shareholders’ agreement, matters which do not have to be approved by shareholders will be dealt with by your board by default.
What are the benefits of having a shareholders’ agreement?
There are a number of benefits to your company and shareholders in having a shareholders’ agreement, which include:
ensuring confidentiality, ensuring commercially sensitive information about your company and the relationship between its shareholders is not available to the public;
protecting shareholders who are not on the board or who hold minority stakes, for example by requiring particular decisions to have the prior approval of any shareholders who hold more than a certain percentage of shares (known as veto rights);
controlling shareholders for a time after they have sold their shares, for instance by restricting their ability to set up a competing business (known as restrictive covenants); and
facilitating a sale of your company, for example by including a clause which forces 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).
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. In contrast, any rights in your company’s articles can usually be changed by special resolution, meaning shareholders who hold 75 per cent or more can change them.
It is also easier for a shareholder to enforce their rights under a shareholders’ agreement compared to other routes (eg enforcing rights written into your articles of association), as it is a direct contract between the shareholders of a company.
Does my company need to be a party to my shareholders’ agreement?
There is no requirement for your company to be a party to the agreement. If you prefer, it can simply be an agreement between your shareholders.
However, it is common to include your company as a party. This is so that your 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.
This may seem odd, as your company is not one of your shareholders. However, many provisions of the agreement will have a direct effect on the company, such as provisions regarding how certain important company decisions should be taken, or how shares should be issued and transferred.
For example, if the agreement requires an employee-shareholder to give up their shares if they quit or get fired, your company will want to be able to enforce this if they refuse. Similarly, if the agreement requires shareholder consent before the company takes out any loan, but your board of directors approaches a lender without asking, a shareholder might want to be able to stop them.
For these kind of reasons, it makes sense both from the company’s perspective and the other shareholders perspective, for the company to be a party to the agreement.
What is the difference between a founders’ agreement and a shareholders’ agreement?
A founders’ agreement is just another description or title for a shareholders’ agreement. Both documents will contain similar provisions, and regardless of the title used, will generally have the same legal effect.
The term ‘founders’ agreement’ is often used to describe an agreement between the founding shareholders of a company, commonly entered into before any fundraising or external investment. However, such an agreement could equally be titled a shareholders’ agreement, and contain exactly the same terms.
What is the difference between a shareholders’ agreement and articles of association?
Every company must have articles of association. This is your company’s constitution, which is publicly available on Companies House. A shareholders’ agreement is a separate private contract between your company’s shareholders (and often your company itself), which regulates their own relationship.
A well-drafted shareholders’ agreement should complement, and not conflict with, your company’s articles. The two often interact and so need to be considered together, and are often produced at the same time. If the agreement changes your articles in some way, and you fail to make changes to your articles so that both match, it will be treated as an effective change to your articles and you have to file a copy of the relevant parts of the agreement at Companies House.
For these reasons, our template agreement has complementary articles of association which you should adopt at the same time as entering into the agreement. You can find links to both templates, and instructions on how to use them, in the Next Steps section at the bottom of this page.
How to enter into and make changes to a shareholders’ agreement
When can I enter into a shareholders’ agreement?
Very simply, at any time during your company’s life-cycle. There is no need for it to be entered into on the date a company is incorporated, or on the date any new shares are actually issued.
When the agreement has been signed by all parties, it will generally regulate the relationship between your company’s shareholders from that date forwards. It will not usually apply retrospectively to previous decisions or conduct, but it will apply to all future decisions and company matters.
Does my company need to approve a shareholders’ agreement?
If your company is a party to the agreement, it will need to formally approve it before entering into it.
Conversely, if your company is not a party to the agreement, no company approval of the agreement is required, as it will be a private agreement between the shareholders.
How should my company approve the agreement?
The way in which your company approves a shareholders’ agreement will depend on what your articles of association say. In most cases, including if your company has the model articles, you will need board approval for your company to enter into the agreement. You may also need separate shareholder approval for other things that might commonly be done at the same time as signing the agreement (for example making changes to your articles of association, or issuing new shares).
If you use our template agreement, you will need to make sure you adopt the complementary articles of association at the same time. In order to do so, you can follow the steps and use the templates linked to in the Next Steps section at the bottom of this page.
Can I change the agreement after it has been signed?
Maybe, as long as you (or your company) are one of the parties to it.
However, unless your shareholders’ agreement allows you to do so with less than 100 per cent consent, you will need to obtain the unanimous consent of all shareholders who are parties to amend or replace any terms in the agreement. Unanimity will even waive any procedural requirements imposed by the agreement itself.
However, it is always best practice to get written confirmation from all the shareholders as to the exact change desired, to avoid any ambiguity or dispute later on.
Can I change the agreement without having to get consent from each party to it?
Yes, but only if your shareholders’ agreement has a provision in it allowing you to amend it by something less than unanimous consent (eg by majority consent). Otherwise you will need unanimous consent.
You are more likely to come across a provision allowing changes with less than unanimous consent in an agreement which has lots of parties, particularly where it is not practical to have to obtain unanimous consent for all changes.
How can I ensure future shareholders are bound by the agreement?
A shareholders’ agreement will only fully bind shareholders who are a party to it. The agreement will not automatically bind future shareholders, so you must ensure that incoming shareholders expressly agree to sign-up to it.
This is usually done by having them sign a document agreeing to be bound by the agreement, sometimes called a deed of adherence. Our template agreement includes a deed of adherence which you can use for future shareholders.
If you want to enter into a shareholders’ agreement, you can use our document assembly tool to create your own fully-customised agreement. To properly use the agreement, you will need to:
- Complete our template shareholders’ agreement.
- Complete our template articles of association.
- Use our template resolutions to obtain the necessary company approvals, namely:
- Board approval of the agreement and the new articles by using one of the following:
- Shareholder approval of the new articles, by using our template shareholder written resolution.
- Have all parties sign the agreement.
- File a copy print of the new articles and the shareholder written resolution approving them. You can use our template filing copy shareholder resolution for this.