What is a Shareholders’ Agreement?

James McKimm

Article written by James McKimm, Solicitor, Corporate and Commercial department

A Shareholders’ Agreement is a contract between the shareholders of a company. It is intended to regulate the relationship between the shareholders across a variety of commercial issues. In some cases, the company itself is also a party to the contract. This is so that obligations and restriction can be imposed directly on the company.

Commonly, a Shareholders’ Agreement will involve provisions such as dealing with restrictions on the transfer of shares, dividend policies, restrictions on the shareholders competing with the company (known as restrictive covenants) and commercial decisions which require the consent of particular and/or all shareholders.

How does it differ to a Company’s Articles of Association?

A Shareholders’ Agreement is a private contract between the shareholders (and in some cases the company as mentioned above). The terms (and even existence of) a Shareholders’ Agreement can remain private and confidential between the parties, and can be tailored to grant different rights to, or impose different obligations on, individual shareholders.

In contrast, a company’s Articles of Association are a set of binding rules which regulate how the company will be governed.  The provisions of the Articles will confer rights and obligations on classes of shareholders (or all shareholders), rather than on individuals. However, perhaps most notably is that the Articles of Association of a company must be made publicly available.

Why do I need a Shareholders’ Agreement?

There are several reasons why having a Shareholders’ Agreement in place is a commercially sensible idea.

Firstly, there is the benefit of privacy. If there are certain commercial matters which you may not want to be publicly available, such as dividend policies or restrictions on transfers, these can be addressed and regulated in a Shareholders’ Agreement.

Furthermore, through a Shareholders’ Agreement, the shareholders can regulate their relationship in such specific or detailed way as they so wish. There are no legal requirements to a Shareholders’ Agreement (save for the normal rules of contract law), and therefore they can be used to cover any array of issues the shareholders may wish to regulate.

Finally, Shareholders’ Agreements are a great way to regulate the tricky issues that can occur in the running of a business. They can include provisions to deal with issues such as a breakdown in the relationship of the shareholders (known as a deadlock), or to deal with eventualities where an individual passes away or becomes incapacitated.

Often these issues go unconsidered, which can be problematic because once they arise, it is commonly too late to deal with them. Therefore, having agreed provisions in place to deal with these issues in advance can save a great deal of time, money, and stress.

What are the limitations of a Shareholders’ Agreement?

A Shareholders’ Agreement cannot prevent a company from taking actions in accordance with the provisions of the Articles and the Companies Act.

However, if a company does pass a resolution or take any action which is a breach of the shareholders agreement, a shareholder may have a claim for breach of contract against those who caused the breach.

Therefore, whilst a Shareholders’ Agreement cannot prevent a company from taking certain actions which may breach the agreement, the threat of breach of contract is a strong deterrent in ensuring that the individual shareholder’s interests are protected, and that the parties act accordingly.

For further advice on Shareholders’ Agreements or to discuss a Corporate and Commercial legal matter further, please feel free to email me or contact the team on 020 8858 6971.