What is a shareholders’ agreement?
All UK companies must have constitutional documents known as Articles of Association, which contain various provisions in relation to the governance of the company and are publicly available at Companies House.
A shareholders' agreement is an additional agreement entered into between the shareholders of a company which contains more detailed provisions than traditionally found in Articles of Association and also private contractual provisions between the shareholders. In addition to regulating the relationship between shareholders, shareholders’ agreements are vital for protecting shareholders and their investments, and they can govern how the company is run.
What types of provisions are usually included in a shareholders’ agreement?
Shareholders’ agreements often include the following provisions:
- Dispute resolution methods
- Voting undertakings or voting restrictions
- Rights to dividends
- Share transfers
- Buyback rights
- Tag-along rights
- Drag-along rights
- Restraints on shareholders participating in competing businesses
- Decision-making within the business (for example, what issues are to be decided by the shareholders and what issues are to be decided by the board)
- Deadlock provisions
- Exit arrangements
What are the key benefits of having a shareholders’ agreement?
Firstly, shareholders’ agreements can help mitigate costly and time-consuming disputes by setting out the dispute resolution method to be used in case of a conflict. For example, the agreement may stipulate that arbitration or mediation should be adopted instead of using Court litigation proceedings. In addition, they can minimise disputes by specifying how deadlocks should be resolved, and by clarifying the framework for decision-making within the business.
Shareholders’ agreements can also protect minority and majority shareholders. For example, by requiring unanimous consent of all shareholders for certain decisions, minority shareholders may be granted the power to veto those decisions. Another form of protection for minority shareholders which may be included in shareholders’ agreements are tag-along rights. Tag-along rights (also known as ‘piggyback rights’) enable minority shareholders to join transactions on the same terms as majority shareholders, where majority shareholders attempt to sell their shares. This means that minority shareholders may sell their shares at the same time and at the same price per share as majority shareholders.
On the other hand, to protect majority shareholders, drag-along rights may be included within the shareholders’ agreement. These rights enable majority shareholders to force minority shareholders to join in the sale of a company. Minority shareholders who are dragged into the sale must be given the same price, terms and conditions as the other shareholders. As such, they may benefit from drag-along rights, as they may realise terms which are better than they had anticipated or which might otherwise reflect their minority stake in the company.
Can a shareholders’ agreement override the company’s Articles of Association?
As mentioned above, shareholders’ agreements may cover issues that shareholders prefer not to be made public. Whilst the shareholders’ agreement and Articles of Association should not contradict each other, it is possible to include a ‘supremacy clause’ within the shareholders’ agreement, to ensure that the agreement overrides the Articles and requires the shareholders to amend the Articles as necessary to ensure the Articles are not in conflict with the shareholders’ agreement on the specific point. If there is no such clause and the shareholders’ agreement is silent on a particular issue, the Articles will take precedence.
When is the best time to create a shareholders’ agreement?
Although a shareholders’ agreement can be created at any time, ideally it should be created at the outset or as soon as there is more than one shareholder. This may be the time when the company is formed or when the first shares are issued.
By managing expectations and dealing with potential issues at an early stage, shareholders may reduce the likelihood of future conflicts. It is also important to review and update the shareholders’ agreement where there is a change of circumstance – for example, if a shareholder wishes to exit the business or if the business seeks to raise capital.
How 3CS can help
Our team of corporate and commercial lawyers and consultants have both domestic and international expertise and offer a full range of corporate and commercial legal services. If you need any assistance to review or create a shareholders’ agreement or have any other questions about such agreements, please get in touch with your usual 3CS contact.
