Managing Risks and Relationships: Shareholders’ Agreements

Shareholders’ agreements is a key resource for ensuring the smooth operation and governance of a company. It is a legally binding contract between the shareholders (and often the company itself). This contract sets out the rules for managing the company, including the rights, responsibilities and obligations of the parties involved. It also includes provisions for resolving disputes.

They often cover matters such as:
• the decision-making process;
• specific rights and obligations of shareholders and their appointed directors;
• restrictive covenants;
• exit mechanisms if a shareholder wants to leave;
• dispute resolutions and resolving deadlock (where shareholders cannot agree); and
• provisions for protecting minority shareholders.

Unlike the articles of association, which are a public document, a shareholders’ agreement is private. This allows shareholders to address sensitive matters discreetly. It is particularly useful for including provisions that shareholders may not wish to disclose publicly. Examples include family arrangements or specific voting agreements.

One of the key benefits of a shareholders’ agreement is its ability to provide clarity and certainty in the decision-making process. It can establish procedures for resolving disputes. This ensures that decisions are made through consensus rather than the unilateral actions of a majority shareholder. It is especially important in preventing deadlock situations that could harm the company’s operations.

Additionally, the agreement can outline reserved matters. These require shareholder approval for significant decisions such as issuing new shares, restrictions on borrowing, making capital commitments or investments. This balances the powers between the board and the shareholders.

Shareholders’ agreements are governed by contract law. An action breaking a company’s articles is likely to be ruled invalid. A breach of the shareholders’ agreement will trigger enforceable personal contractual remedies such as damages or injunctions.

Although you are not legally required to have a shareholders’ agreement, you should consider one if you have two or more shareholders. It can offer flexibility, privacy and enhanced protection for shareholders. Putting a shareholders’ agreement in place at the outset can save time and money at a later stage.

You must be careful to ensure that the provisions of the shareholders’ agreement complement the articles of association. They must also work within the statutory framework of company law. We recommend you seek legal assistance with drafting these documents.

Please contact the Corporate Team at mlplaw on corporate@mlplaw.co.uk