Putting in place a properly drafted shareholders’ agreement (sometimes also referred to as a joint venture agreement or ‘JVA’) prepared by an experienced solicitor at the outset of a company’s life can ensure the smooth running of the company’s business and reduce the risk of disputes arising in the future.
A shareholders’ agreement or JVA is a contract made between the shareholders of a company under which they agree how a company will be run. Typically in a shareholders’ agreement the parties will agree as a minimum:
- Their right and obligations in relation to the company.
- How the company’s business will be operated.
There is no legal requirement under the Companies Act for shareholders to put a shareholders’ agreement in place. However without a shareholders’ agreement there can be some considerable uncertainty over the shareholders’ rights in relation to the company and in particular what will happen in the event of something going wrong or a dispute arising.
Some of the detail of how a company will be run will already be set out in the company’s articles of association (or just ‘Articles’). The company’s Articles are its constitution and are filed at Companies House. The Articles are not however always the right place to set out all obligations agreed between shareholders as:
- There are limits on what can legally be included in a Company’s articles.
- The articles can generally be changed by those holding 75% of the shares in the Company making it more difficult for a minority shareholder to protect their position (a shareholders’ agreement on the other hand usually needs all parties to agree any changes).
- The Articles are open to public inspection on the Companies House website – they are not therefore suitable for documenting sensitive commercial arrangements.
We have a wealth of experience in preparing, negotiating and advising on shareholders’ agreements for business ranging from start-ups to well established international firms entering into complex JVAs. We are also well versed in the issues that can arise between shareholders during the life of a business and can offer practical commercial advice as to how to legislate for those issues in a shareholders’ agreement.
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Typical provisions contained in a shareholders’ agreement include:
- The Company’s Business – clearly setting out what the Company will do can be important particularly if shareholders have interests in competing or related businesses. Unlike directors, shareholders hold little in the way of legal obligations to the company they own shares in unless there is a contractual obligation to the contrary.
- Level of Commitment – will the shareholders be expected to devote their full time and attention to the Company’s business? Will they be entitled to maintain outside business interests?
- Rights to appoint directors – unless a shareholder has a voting majority they do not have the right to appoint a director to the Company’s board. A shareholders’ agreement can confer on a shareholder a contractual right to appoint a director to represent them on the board.
- How directors and shareholders’ meetings are to be dealt with - who is entitled to attend, what quorum is required, how conflicts of interest are to be dealt with.
- Limitations on the directors or the Company’s authority to undertake actions without shareholder consent - most shareholders’ agreements will contain a list of ‘reserved matters’ which either require some or all of the shareholders’ to consent to (or that they have a right of veto over). Common examples of ‘reserved matters’ are:
- Limits on spending and borrowing.
- Restrictions on entering into contracts over a certain value.
- Decisions on buying and selling assets.
- Changing the share structure of the company.
- Hiring and dismissing employees.
- Changing auditors.
- Changing the company’s articles.
- Entitlement to information – at law shareholders have very little entitlement to information about the company’s day to day business and finances. A shareholders’ agreement can grant shareholders rights to detailed information in relation to the company’s business.
- Provisions governing share transfers – for example requiring one party to offer their shares to the other before they can be offered to a 3rd party. Most agreements (in conjunction with the Company’s Articles) will also include a mechanism for shares to be valued in the event of a sale.
- Restrictions on shareholders’ competing with the company – these would normally include restrictions on operating in competition with the business of the Company whilst owning shares in the Company and for a period of time after they cease to own any shares.
- How the business is intended to be financed – e.g. from shareholder loans, bank borrowings. The extent of the parties obligations to provide further finance.
- Dispute resolution mechanisms – a company can be paralysed by shareholder disputes and without an effective dispute resolution mechanism in place it can be very costly and time consuming to try and resolve a shareholder dispute through the courts. A carefully prepared shareholders agreement will include provision for resolution of disputes. A number of possible options can be considered such as mediation, buy-out options or in a worst case scenario, agreeing to wind the company up.
- Minority shareholder protection provisions - these can range from rights of veto on important decisions (as described above) and so called ‘Tag Along’ rights giving a minority shareholder the right to be bought out in the event that the majority wishes to sell their shares to a 3rd party.
- Majority shareholder protection provisions - these can include a right to require the minority to vote in a particular way, enhanced voting rights on key issues and ‘Drag Along’ rights (under which a majority shareholder can force a minority shareholder to sell their shares to a 3rd party if the majority wishes to sell up as well).
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