It is not a legal requirement for a company or its shareholders to have a Shareholders’ Agreement. However, it is something that we recommend all our commercial clients to consider who operate their business through a limited company vehicle.

A Shareholders’ Agreement can provide stability and guidance in the running of your business and enable an agreed framework to be used when conflicts arise either in principle or in practice that would otherwise not be regulated.

The Shareholders’ Agreement is not a public document registered at Companies House in the same way that the company’s Memorandum and Articles of Association (M&A) must appear on the Register. It is entirely private as between the individual Shareholders and if appropriate between those Shareholders and the Company.

Unlike the M&A, which represents the Company’s constitution and the rules by which it is governed to the outside world, the Shareholders Agreement represents a binding agreement for the operation of the Company as between its owners, the terms of which can be enforced by and against individual Shareholders.

What are the usual clauses in a Shareholder’s Agreement?

Shareholders in a Company need to have control of their investment. A Shareholders’ Agreement sets out rules in relation to which decisions have to be made unanimously and which decisions can be made by a majority vote.

There are a number of common areas which a Shareholders’ Agreement should address and they include the following:

• A prohibition or restriction on the transfer of shares - this often includes a right of pre-emption (first option for existing Shareholders to buy) before a Shareholder can transfer to a third party;
• What should happen on the death or bankruptcy of a Shareholder;
• How the value of the shares is to be determined - for example, whether minority shareholdings should be valued on a discounted basis;
• The business activities which the company will carry on;
• Any agreed exit route and timescales;
• Any company dividend policy – that is the proportion of profits to be paid out as dividends and the proportion to be retained to fund the requirements of the business;
• The make-up of the board of directors and senior management team, their remuneration and other terms of employment.

Other parts of the Shareholders Agreement often provide that important decisions, whether or not they would ordinarily be taken by the directors or the Shareholders, cannot be made unless all Shareholders agree to them - so minority Shareholders can exercise a veto over those issues - or unless a specified majority of the Shareholders agree to them.

Typically, these include decisions to:

• issue further share capital;
• change the Company's articles of association;
• buy or sell a business or other assets over a certain value;
• buy or sell a significant stake in another company;
• acquire or dispose of any premises;
• appoint or remove a director;
• award directors or employees more than a certain value of remuneration;
• dismiss a director or employee earning more than that remuneration;
• borrow above a certain level or grant security over the Company's assets;
• take action to wind up the Company.