How to Write a Shareholder Agreement

A shareholder agreement is a legal document that outlines the rights, responsibilities, and obligations of shareholders in a company. It’s important to ensure the smooth running of the business by having clear guidelines for decision-making, ownership transfers, and dispute resolution. Here’s a step-by-step guide on how to write a shareholder agreement.

Why is a Shareholder Agreement Important?

Clarity and Protection: It defines the roles of each shareholder and helps prevent conflicts.

Dispute Resolution: It includes mechanisms to resolve disputes amicably.

Minority Shareholder Protection: It protects minority shareholders from unfair treatment.

Customisable Terms: It can address specific business needs and ensure long-term stability.

Shareholder Agreement Components1. Parties

List the names of the company shareholders, their percentage of shares, and any initial capital contributions.

2. Management and Decision-Making

Outline voting rights, board composition, and how decisions will be made, especially for significant decisions like mergers or acquisitions. This is crucial in ensuring that all the shareholders have a say in the company’s business direction.

3. Ownership and Share Transfers

List rules for share transfers, including pre-emption rights, buy-back options, and restrictions on selling shares to other shareholders or third parties.

4. Dividend Policy

Include terms for the distribution of profits and reinvestment policies to ensure fair returns for all the shareholders.

5. Minority and Majority Shareholder Protections

Include drag-along (enabling majority shareholders to force others to sell) and tag-along clauses (protecting minority shareholders during a sale).

6. Confidentiality and Restrictive Covenants

Protect company property and prevent shareholders from competing with the company. This is particularly important for private companies limited by shares.

7. Dispute Resolution Mechanisms

Specify how disputes will be resolved, whether through arbitration, mediation, or litigation. This ensures that shareholders can resolve any disagreements quickly and efficiently.

8. Exit Provisions

Cover scenarios like death, bankruptcy, or retirement of shareholders and the process for share valuation in such cases.

When to Write a Shareholder Agreement?

You should write a shareholder agreement:

• At the start of the company.
• When new shareholders join the company.
• Before any major investment or business milestone.

Delaying drafting may lead to misunderstandings or shareholder disputes, which can harm the company.

How to Write a Shareholder Agreement

Get Legal Advice: While templates are available, it’s best to have a solicitor customise the agreement to your company’s needs. This will ensure the shareholders agreement is legally binding and addresses both the existing shareholders agreement and the concerns of any new shareholders.

Add Custom Provisions: Consider the company’s specific needs, such as handling intellectual property or appointing directors.

Consistency with Articles of Association: If there’s a conflict between the shareholder agreement and the company’s articles of association, the articles will prevail unless the agreement has a supremacy clause. This will ensure that the shareholders agreement overrides articles in certain cases.

Shareholder Agreement FAQs

Is a shareholder agreement mandatory?
No, but it is highly recommended for any company with multiple shareholders to avoid disputes and protect their rights.

Can I draft my own shareholder agreement?
Yes, but it’s advisable to get professional legal advice to cover all legal aspects, especially for complex issues like shareholder loans or voting rights.

Does a shareholder agreement supersede the Articles of Association?
Generally, the company’s articles of association will prevail unless the shareholders agree otherwise in the agreement. A shareholders agreement override articles clause can be included to clarify which document takes precedence in certain situations.

What happens if there’s no shareholder agreement?
The company will default to the Companies Act 2006 and its Articles of Association, which may not cover specific shareholders’ needs or concerns.

What should a shareholder agreement cost?
Costs can vary but typically range from £500 to £2,000 for a professionally drafted agreement, depending on the complexity.

Summary

A well-written shareholder agreement promotes collaboration among shareholders and the longevity of the private company. By covering aspects like minority shareholder protection, dispute resolution, and share transfers, you can ensure the company grows smoothly. Legal proceedings or disputes arising from unclear terms can be costly, so getting a clear and binding agreement from the start is crucial. Consult a qualified solicitor to draft an agreement tailored to your company’s needs, addressing both new shareholders and existing shareholders agreements for a long-term solution. A clear agreement can also help in shareholder meetings and ensure smoother governance.