Shareholders' Agreement: a complete guide (lawyer-drafted template included)

If you are going into business with someone else (or a group of people) and a limited company has been formed, you will each hold shares in the company (making you each a shareholder). Where there are multiple shareholders of a limited company, it's crucial that an agreement is put in place between shareholders, to protect each shareholder (and the company too!).

What is a shareholders’ agreement?

A shareholders' agreement is a legal document that outlines the rights and responsibilities of shareholders in a limited company. A well-drafted agreement helps to avoid disputes in relation to how decisions are made about a company, as shareholder agreements manage the overall relationship between a company and its shareholders.

Why does my company need a shareholders’ agreement?

A shareholders' agreement is one of the most important documents for a limited company, as it deals with the governance, management and decision-making of a company as well as the rights of shareholders. Find out below some of the top reasons how a shareholders’ agreement can add value to your company, whilst also protecting your own rights as a shareholder:

  1. Protection to shareholders - a shareholders' agreement can ensure that the rights of all shareholders are protected (whether majority or minority shareholders), but if you are a minority shareholder it can be particularly important to ensure that you are given all rights in respect of the company that you are expecting (e.g. in relation to decision-making powers and payment of dividends).

  2. Avoid future disputes - a written agreement between shareholders can also provide a mechanism for resolving disputes between shareholders, including how decisions are made and how disagreements are resolved. A clause should be included that includes a clear mechanism for dispute resolution, so that if things do go wrong there is a firm process in place to try and fix them, without damaging the company or each shareholder’s rights.

  3. Credibility for future investments - a well-drafted shareholders' agreement will set out the terms of the investment made by a shareholder, including the amount of capital invested, the timing of any additional investments (if required), and the expected returns on investment. Having a shareholder agreement in place can therefore be extremely attractive to future, external investors, as they know there will be an agreement in place to protect their interests as a shareholder after the investment is made. If you are looking to sell your company in the future, it also shows buyers that you have proper procedures and documents in place for your company to add to its credibility.

  4. Clear exit strategies - a shareholders' agreement can provide exit strategies for shareholders, including mechanisms for the sale or transfer of shares, buyout provisions, and restrictions on the transfer of shares. This means that shareholders know exactly which circumstances they can and cannot sell their shares in.

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What are the top 5 clauses to include in a shareholders agreement?

There is no doubt that shareholders' agreements are a crucial document to protect shareholders and their company - but what do shareholders' agreements actually include?

  1. Shareholder and director’s powers - a shareholder agreement sets out the decision-making process for the company, including voting rights for shareholders, the quorum required for meetings, and the frequency of those meetings. It also defines the authority of the board of directors and outlines the procedures for appointing and removing directors. Clearly setting out these matters in writing provides protection for minority shareholders, and avoids any ambiguity over the power split between shareholders and directors.

  2. Reserved matters - reserved matters are those decisions or actions that require the approval or consent of the shareholders of a company - sometimes a certain percentage of the shareholders must give their consent or a specific class of shareholders has to approve the decision. It is important to include provisions relating to reserved matters in a shareholders’ agreement to provide a level of control and protection for the shareholders over important decisions and actions that could significantly impact the company's operations, finances, or even ownership structure. Examples of reserved matters that can require shareholder approval include: appointing auditors, entering into unusual transactions or agreements, amending the company’s articles, matters relating to the capital of the company and lots more!

  3. Payment of dividends - a clause should be included that outlines the procedures for distributing profits or dividends to shareholders. The clause should specify how and when the company will distribute profits (via dividends) to the shareholders. It will set out how dividends will be calculated so that there is a clear process in place e.g. whether it will be based on profits or other financial metrics. A dividends clause is an important aspect of a shareholder agreement as it provides clarity and transparency regarding how the company plans to distribute profits to its shareholders. It also helps to avoid any misunderstandings or disputes among shareholders regarding the payment of dividends in the future.

  4. Selling shares - the procedure for shareholders to transfer or sell shares should be clearly set out in a shareholders' agreement, so that shareholders know when and how they can exit (if they want to in the future). Where shares are being sold, it is vital to have procedures in place in relation to those shares. For example, pre-emption rights, also known as rights of first refusal, are also often included in a shareholders' agreement to give the existing shareholders the right to purchase any shares that another shareholder plans to sell. The purpose of pre-emption rights is to ensure that the existing shareholders have the opportunity to maintain their proportional ownership in the company and to prevent unwanted (or unknown) third parties from becoming shareholders and therefore diluting the existing shareholders' powers and rights.

  5. Restrictions on shareholders - for a shareholders’ agreement to have maximum impact, it should set out what shareholders can and cannot do. This can include non-compete provisions and restrictions on selling shares to outside parties. These are sometimes known as “restrictive covenants” and can help protect the interests of the other shareholders. For example, they can prevent exiting shareholders from soliciting employees from a company after they leave, and taking client information to set up a competing business.

Other optional clauses can also be included in a shareholder agreement, particularly where there is a range of different levels of shareholdings (so a company is made up of both minority and majority shareholders). This can include:

  • Drag-along rights: drag-along rights allow majority shareholders to force minority shareholders to join in the sale of the company. They are often included in shareholders' agreements to ensure that in a share sale situation, the sale can proceed smoothly without minority shareholders stopping the sale or demanding a higher price than the one that the majority shareholders have negotiated; and

  • Tag-along rights: tag-along rights are a provision in a shareholders' agreement that protects minority shareholders in the event that majority shareholders want to sell their shares. The rights provide protection for minority shareholders by allowing them to "tag along" with the sale and sell their shares at the same price (and on the same terms) as majority shareholders. These rights are often included in shareholders' agreements to protect minority shareholders from being left behind (with unknown third parties) when majority shareholders sell their shares.

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How does a shareholders’ agreement affect the company’s articles of association?

Every limited company is required to have in place articles of association that must be publicly available on Companies House. Unlike articles of association, shareholders' agreements are private legal documents between a limited company and its shareholders. There is no requirement for a shareholder agreement to be published on Companies House (or made public via any other means).

A shareholders' agreement and a company's articles of association are two separate documents that are used to govern the rights and responsibilities of shareholders in a company. However, both documents are related and can also affect each other in a number of ways. Articles of association set out the company's internal rules and regulations, including the company's purpose, share structure, and decision-making process of the board of directors and shareholders. On the other hand, a shareholders' agreement sets out the rights and obligations of the shareholders in relation to the company.

There can be some overlap between the contents of a shareholder agreement and articles of association. Because of this, it is important to include a clause in a shareholders’ agreement that makes it clear that the terms of that agreement will take precedence over the articles, in the event there is any conflict.

Can a shareholders’ agreement be changed?

After a shareholders' agreement has been entered into, there are two ways in which it can easily be changed (if required) using Docue's other corporate templates:

  1. Deed of adherence - as your company continues to grow, you may bring on board more shareholders in return for investment. A deed of adherence is a legal document that allows a new shareholder to become a party to an existing shareholders' agreement. When a company already has a shareholders' agreement in place, new shareholders may need to adhere to the existing agreement to ensure that all shareholders are subject to the same terms and conditions. A deed of adherence adds the new shareholder as a party to the existing shareholders' agreement, and binds them to the same terms and conditions as the original parties. The new shareholder will be required to sign the deed of adherence as a formal agreement to adhere to the existing shareholders' agreement. This mechanism avoids having to put a brand new shareholder agreement in place each time a new shareholder joins the company.

  2. Deed of variation - if you want to make other changes to a shareholders’ agreement after it has been entered into, you can do this by entering into a deed of variation to the shareholders' agreement that sets out the changes being made. All parties to the original shareholders' agreement must sign the deed of variation to show that they agree to the changes.

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Can I write a shareholders’ agreement myself?

Yes! With Docue, you can easily prepare a bespoke shareholders agreement that is customised to your needs. Our automated shareholders' agreement template covers all the matters discussed above.

Shareholders' agreements can include complex legal concepts, but don’t worry as Docue’s lawyer-drafted guidance notes are there to guide you through the process and help you answer the questions that will produce a bespoke shareholder agreement template. Simply click through the intelligent tick box options and text box answers and you’ll have a comprehensive, tailored, and ready-to-use shareholders’ agreement template in no time.

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Tags: shareholders agreement, agreement between shareholders, board of directors, protection for minority shareholders, initial shareholders, majority shareholder, shareholder approval, limited companies, restrictive covenants, advice on shareholders, protection to shareholders, fellow shareholders

Docue Legal Team