What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a legally binding agreement entered into between the shareholders of the company, and in some instances, the company. A Shareholders’ Agreement governs the rights and obligations of each shareholder and in turn, provides protection to each shareholder.
Function of a Shareholders’ Agreement
Unlike the Articles of Association of a company, a Shareholders’ Agreement is a private document. Therefore, it does not need to be filed at Companies House and allows the shareholders to deal with more sensitive information which they do not wish to be made public.
A Shareholders’ Agreement can be used in the following situations:
- “a private limited company with multiple shareholders to set out, amongst other things, terms governing the relationship between the parties, issue and transfer of shares and directorships.
- a joint venture, to deal with the ongoing relationship of the joint venturers as shareholders in the joint venture company, and covering such issues as appointment of directors, distribution policies and reserved matters for shareholders.
- a management buyout transaction, the investment agreement is known as the shareholders’ agreement and evidences the commitment of both the private equity provider and the management team to subscribe for shares in the new company.”[1]
Advantages of a Shareholders’ Agreement
Confidentiality
It is important to note, that a Shareholders’ Agreement is not legally required therefore, despite the situations above, the requirement to have one prepared is discretionary. Having said that, a Shareholders’ Agreement is strongly recommended as the agreement provides undisputed clarity in respect of the shareholders rights and obligations.
Control of transfer of shares
Imposing the restriction on the transfer of shares is commonly seen in a Shareholders’ Agreement. The restrictions may include provisions on pre-emption rights, change of ownership and compulsory transfers. By including such provisions, the interests of each shareholder are protected and preserves the stability in the company.
[1] Shareholders’ agreement | Glossary | Practical Law
Protection for Minority Shareholders
A Shareholders’ Agreement can provide protection to the minority shareholders by requiring certain provisions to need unanimous approval for certain decisions, meaning if one shareholder disagrees with the decision, the decision will not be approved, regardless of the amount of shares they hold in the company. In addition, a Shareholders’ Agreement can also contain tag-along rights, which are sometimes referred to as piggy back rights. The tag-along rights acts as a protection for the minority shareholders whereby they can force the other shareholders to procure an offer for the shares benefiting from the rights, thus allowing them to sell their shares at the same time and at the same price per share.
Protection for Majority Shareholders
A Shareholders’ Agreement can include drag-along rights which go alongside tag-along which is mentioned above. The drag-along rights enable a majority shareholder to compel the minority shareholders to participate in the sale of the company, to ensure the buyer can acquire the entire share capital of the company.
Conclusion
A Shareholders’ Agreement plays a fundamental role in corporate governance by defining the relationships amongst the shareholders, the directors, and the company. Additionally, such an agreement can provide for any eventuality such as, the management of the company, the dividend policy, the procedure to follow for a transfer of shares, the valuation of shares and deadlock situations.
It is important to avoid conflicts between the Shareholders’ Agreement and the Articles of Association of the company. It is common to provide that a Shareholders’ Agreement prevails over the Articles of Association and is therefore enforceable between the parties. It is however, at the parties’ discretion to decide which document prevails.
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