In the context of limited companies, Company Law outlines specific rules governing decision-making processes based on the ownership of shares. If shareholders collectively possess more than 50% of the shares, they have the authority to pass a motion during company meetings, irrespective of the opinions held by other shareholders. Additionally, if a shareholder or group of shareholders holds 75% or more of the company’s shares, they control the company outright and can exercise veto power over decisions made by all other shareholders.
However, this framework may not always be suitable for every business scenario. For instance, it may not be ideal for companies with multiple founders who each hold an equal share of the capital, or for businesses where ownership varies among a group of individuals, some of whom serve as directors while others do not.
In these cases, all or some of the shareholders typically enter into a shareholders’ agreement. This agreement serves to regulate the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. They also govern the way in which the company is run.
The agreement can help define how a business makes decisions to the benefit of all owners and is recommended where:
- A small number of owners want to reach collective and fair decisions for the benefit of all;
- Some owners may want to be able to influence decisions that are particularly relevant to them;
- Some shareholders may not be directors and cannot influence operations on a day-to-day basis;
Typically, it is seeking to deal with the three “D’s” of death, disability and disagreement. It may also cover a variety of other significant areas for example, retirement and buy back of shares.
Key areas for any shareholder agreement
Please note that this is not a comprehensive list, as each unique situation may require additional considerations. However, it can serve as a valuable tool to help you collect the thoughts of all shareholders before you draw up an agreement.
- Company details including structure, directors, and officers
- Purpose and aims of the company
- Equity split of shareholders
- Parties to the agreement
- Shareholders rights, obligations and commitments
- Decision making processes on major issues, required voting majorities and day to day operating decisions
- Restrictions on the sale of shares
- Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death, or disability
- Death, disability, and other retirement compensation payments
- Management contracts, director approval, and remuneration amounts
- Insurance and other protective requirements
- Professional advisers and change of professional advisers
- Dispute resolution
- Changes to and termination of the agreement
- Buy out provisions for leaving shareholders
- Valuation of shares on changes and valuations of the business
A shareholders agreement is an essential document for any limited company and an equitably drafted agreement should provide comfort to all involved parties.
If you need help planning for an agreement, or some advice for your next (or first steps), get in touch with one of the team.