Private Companies : The importance of a Shareholders ’ Agreement
Jacksons Law Firm corporate and commercial solicitor David Artley offers some important advice to private business owners around the importance of Shareholders ’ Agreements …
How important is a shareholders ’ agreement ?
Ask a corporate solicitor about a situation involving a fellow shareholder and the first thing they will ask is if you have a shareholders ’ agreement . Every private limited company with multiple shareholders should have a shareholders ’ agreement . Why they are so important ? A company is a legal entity , it has a distinct legal ‘ personality ’, akin to a person . The company can own property , be sued , sue and enter into contracts in its own right . The company owns its assets , and the shareholders own the company . But a company cannot ‘ make ’ decisions ; for that it has its board of directors .
What happens if the company ’ s interests and the individual directors ’ interests conflict ? There are two default solutions :
The legal duties on directors to act in the best interests of the company ( more a last resort ); and the shareholders ’ power to define the powers of the directors ( better but not ideal ).
Shareholders have two main sources of power . First is the articles of association ; the main constitutional document of a company . It says what directors can and cannot do and it can be altered only if at least 75 per cent of the shareholders agree . The second is that , by law , directors must ask the shareholders to vote on certain actions , called resolutions . Resolutions can be ordinary ( agreed by more than 50 per cent ) or special ( agreed by 75 per cent or more ).
There are problems with relying on just the default sources of shareholder power , however .
Most obvious ? The power to make decisions is linked to how many shares are owned . The owner of 20 per cent has little power against the remaining 80 per cent , but 20 per cent could represent a significant investment needing protection ; the company may have difficulty securing investment if it is not protected . Or 50 / 50 ownership where the two owners vote different ways ? Deadlock .
Second problem ? The articles of association must comply with the Companies Act 2006 , both in what they cover and how they cover it . If the Companies Act says that a special resolution is required , the articles of association cannot say that an ordinary resolution will suffice , for example .
A third ? The articles of association are essentially a contract between the company and each shareholder , not between the shareholders . They focus on protecting the shareholders from the company / directors , not protecting the company from its shareholders . They could not stop a fellow shareholder setting up a rival company , for example .
The solution ? A shareholders ’ agreement – an agreement between the shareholders setting out how they will use the powers and rights as shareholders , enforceable by each shareholder against the others . It is not regulated by the Companies Act so it can cover a far wider range of situations in a very flexible way .
Do you want a different voting threshold for a particular decision ? First hold a vote under the shareholders ' agreement ( not regulated ) and the shareholders must vote to give effect to that decision in the regulated vote , even if they disagree .
Or do you want to prohibit a shareholder from competing with the company ? The shareholders ’ agreement could require all their shares to be sold to the company if they do , and at a favourable price .
Finally , how do you or your fellow shareholders plan to leave the business ? If a takeover offer is received , can you require others to accept it ? Or can you prevent them selling shares unless the buyer will buy yours , too ? You could have a lot riding on this , and it is good to know where you stand .
Often a shareholders ’ agreement is used to solve a problem . A difficult and expensive argument can be avoided by a robust agreement .
Anecdotally , it seems companies with a shareholders ’ agreement have fewer arguments in the first place .
Planning for the situations and decisions of the future is best when there is goodwill and calm - a shareholders ’ agreement should be one of your first company documents .
David Artley Solicitor , corporate and commercial , Jacksons Law Firm
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