What is a shareholders' agreement and why do you need one? (Incl. lawyer-drafted shareholders agreement template)

What is a shareholders' agreement template?

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 you find the right shareholders' agreement template, to protect each shareholder (and the company too!).

A shareholders' agreement template 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 a shareholders' agreement template will have provisions to manage the overall relationship between a company and its shareholders.

Why does your business need to use a shareholders' agreement template?

A shareholders' agreement template 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 using a shareholders' agreement template can add value to your company, whilst also protecting your own rights as a shareholder:

1. Protection to shareholders

A shareholders' agreement template will include clauses that 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

Using a good shareholders' agreement template can also help by setting 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. Using a well-drafted shareholders' agreement template 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 template will include clauses that 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.

Key provisions of Docue’s shareholders' agreement template

There is no doubt that a shareholders' agreement template can be a crucial document to protect shareholders and their company - but what do agreements between shareholders actually include?

1. Shareholder and director’s powers

Our shareholders' agreement template 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 an agreement between shareholders 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! All of these can be included in Docue’s shareholders' agreement template.

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 an agreement between shareholders 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 template, 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 an agreement between shareholders 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. More information about pre-emption rights can be found here.

5. Restrictions on shareholders

For an agreement between shareholders 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 via Docue’s shareholder agreement template, 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 / tag rights - more information about those rights can be found here.

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How to draft a shareholders' agreement using Docue’s shareholders agreement precedent

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.

Agreements between shareholders 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 agreement. Simply click through the intelligent tick box options and text box answers in the shareholder agreement template and you’ll have a comprehensive, tailored, and ready-to-use agreement between your shareholders in no time.

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