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Shareholders

If you’re here you almost certainly know that a shareholders’ agreement is a contract between the shareholders of a company, setting out their respective rights and obligations with respect to the ownership and management of the company.  As such, the shareholders’ agreement covers a lot of the same ground as the company’s articles of association, but unlike the articles the shareholders’ agreement is a private agreement which does not need to be filed at Companies House.

Not an exhaustive list, but issues to think about when working on your shareholders’ agreement:

  • What will the company be doing? Will you be agreeing a business plan, either for the first year or two, or on an ongoing, annual basis? Will any profits be distributed as dividends to the shareholders, or reinvested in the business, or both? Are you planning on running the business for the long term, or building up the business with a view to an exit? If so, when?
  • How will the business be funded? Are additional shares being issued, either to existing or new shareholders? Will all the shareholders have the same type of shares, with the same voting rights and entitlements to dividends and capital? Is any of the funding being provided by way of loans? If so, on what terms?
  • Who will be doing the day to day work? Will they be entitled to be paid for their work, over and above any profits generated by the company?
  • Who will be the directors? How often, and where, will board meetings be held? How many directors need to attend the meeting for decisions to be made? How can directors be removed, and/or additional directors appointed?
  • What types of decisions will the directors need to refer to the shareholders? For decisions that require shareholder approval, what percentage of the shareholders is required? Will minority shareholders be given any special protections from the “tyranny” of the majority?
  • What happens if a shareholder, or some shareholders, want to sell their shares? Who can they sell to? Should all the other shareholders have first dibs? Are the shares valued by an independent accountant, by reference to a pre-agreed formula, or by some other method? What happens if a shareholder dies, or is permanently incapacitated?
  • If the majority of the shareholders want to sell to a third party, should the minority shareholders be required to sell as well? Should the minority shareholders have the right to join in the sale? What constitutes a majority and a minority for these purposes?
  • If a shareholder is also an employee, what happens to their shares if they resign? Or if they are fired? If they have to sell their shares, then can the company buy them?
  • What restrictions should apply to a shareholder leaves? How long should any restrictions continue?