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| 23 April 2018

Shareholders' Agreements

Protect your business – If you are thinking of incorporating a company or if you are already a shareholder of a company it is essential that you have sufficient control and protection for both the company and your own personal interests.

WHAT IS A SHAREHOLDERS AGREEMENT?

A Shareholders Agreement is a contract between the shareholders of a limited company which governs how that company will be run.

It should clearly set out the rights and obligations of each shareholder, detail how the company may be run and determine how certain decisions are made.

WHY HAVE A SHAREHOLDERS AGREEMENT?

Whilst it may be easy to assume that you will always have a good relationship with those you enter into business with, unfortunately, this is not always the case. Things can and may go wrong, individuals may no longer be able to work together and opinions on how the company should be run may change.

A Shareholders Agreement, whilst not compulsory when incorporating a company, is a way to ensure that the relationship between multiple shareholders is clearly set out. The vast majority of incorporated companies rely on the standard or ‘model’ Articles of Association produced by Companies House and these do not include much detail in relation to protective provisions for shareholders of a company. As such, a Shareholders Agreement can offer shareholders a greater level of protection and certainty.

HOW WILL A SHAREHOLDERS AGREEMENT PROVIDE PROTECTION?

A Shareholders Agreement can contain the following provisions:-

• How dividend payments are decided and paid – including who will decide whether a dividend payment is to be made and on what percentage basis;

• How shares in the company may be transferred – including pre-emption rights to ensure that current shareholders are offered the shares prior to any third parties;

• How shares in the company shall be dealt with on the death of a shareholder – including whether these shares will pass under a will or whether they will be offered to the remaining shareholders;

• Whether shareholders in the company shall be subject to restrictions – including whether they are permitted to assist a competing business or hold shares in another company; and

• How decisions in the company can be made – including the percentage of shareholders votes required to carry out specific actions.

The provisions can offer protection and certainty to both equal shareholders, and minority or majority shareholders.

In the event that there are equal shareholders, additional provisions can be included in relation to deadlock situations where shareholders are unable to come to a decision.

CAN SHAREHOLDERS AGREEMENTS BE AMENDED TO ADD OR REMOVE SHAREHOLDERS?

The provisions of a Shareholders Agreement can be varied in order to add or remove shareholders. This enables the agreement to remain flexible in line with the requirements of the company as it develops and also ensures that any new shareholders will also be governed by the same agreement.

ARE SHAREHOLDERS’ AGREEMENTS MADE AVAILABLE AT COMPANIES HOUSE?

A Shareholders Agreement is a private agreement between the shareholders to which it relates and does not need to be made available to any other parties unless specifically agreed. It can contain a confidentiality clause to ensure that it remains between the shareholders whom are a party to it. It will not be a matter of public record or published at Companies House.

Although a Shareholders’ Agreement may not be called into action, it is better to be safe than sorry.

Whether you are thinking of setting up a limited company, or if you already own shares in a company, our specialist team of Commercial Solicitors can provide you with the assistance you require to ensure that both the shareholders and company are protected.

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