Lawyers South London

What is a shareholders’ agreement?

A shareholder’s agreement is a contract between the shareholders of a company in which they agree how the company will be run.

What does a shareholders’ agreement do?

Shareholder agreements vary and are subject to negotiation, but a typical use is to protect against a majority using their voting power to the detriment of the others.

What are typical provisions to protect shareholders’ interests?

Unless constrained by a shareholders’ agreement, shareholders with a simple majority of votes (e.g. two out of three equal shareholders) have very wide powers under company law. Without requiring any consent from the other shareholders, they can appoint new directors (perhaps their friends or family members), remove any director (such as one of the other shareholders), vote to pay themselves salaries or fees which other shareholders or directors do not get or issue more shares (so diluting existing shareholders’ ownership of the company). These are only examples. A shareholders’ agreement can provide that such important decisions can only be made with the consent of all the parties or, sometimes, a specified majority of them.

What provisions can be included to give shareholder a say in company decisions ?

Being a shareholder does not provide rights to be a director and that is usually one of the provisions of a shareholders’ agreement. Most agreements will go further by providing a list of management decisions that require the agreement of all (or a specified percentage of) the directors. Circumstances vary, but typical provisions relate to matters that are outside the usual course of the business, such as changing the nature of the business, entering into unusual contracts or contracts in which a director is personally interested, extending the company’s overdraft (which often all directors have personally guaranteed), borrowing above agreed limits, employing or dismissing staff in unusual circumstances or bringing or defending legal proceedings.

One of the most important areas is the rules that apply when a shareholder wants to transfer his or her shares, and what can happen to them when the shareholder dies. There are many alternative methods of dealing with such situations including :-

• pre-emption provisions (giving the other shareholders a first option to buy the shares)
• free transfers to members of the shareholder’s family
• for all transfers to require the consent of all shareholders.

What are other item which may be in a shareholders’ agreement  ?

• How directors are appointed and how the board will take decisions.
• Dispute resolution procedures.
• How the business will be financed and profits distributed.
• Rules on transferring shares, including what happens when a shareholder dies.
• Rules on employment of family members
• Rules restricting shareholders from competing with the business.
• Rules protecting confidential information.
• Agreements protecting external shareholders

What other legal issues may need to be considered when starting a business ?

• whether the business requires any licence (for example, to run a nursing home) and if so obtain one.
• negotiating a lease on business premises.
• health & safety assessment.
• If there will be employees, several issues arise, including drawing up a statement of  main terms of employment, or even a full-blown contract of employment
• registering with the PAYE office
• employers’ liability insurance.
• standard terms and conditions of trade.
• intellectual property, such as a business or brand name that you can protect as a trade mark; a design or invention that you can protect by registering it, or materials that you use (such as plans or blueprints) that are protected by copyright, and confidential information that you need to keep secret from competitors.
• If you expect your turnover to exceed the registration threshold, or if you wish to, you will need to register for VAT with HM Revenue & Customs.