What should be included in a Shareholders’ Agreement?

A Shareholders’ Agreement is a vital legal document that can provide a solid foundation for your business, not only by documenting agreed-upon terms but also by helping to avoid disputes and facilitating their resolution if they arise.

As a co-founder of a new startup, it’s essential to know what should be included in a Shareholders’ Agreement.

In this article, we delve into the key components that a well-drafted Shareholders’ Agreement should contain, ensuring that your business operates smoothly and efficiently, with minimal risk of conflicts or misunderstandings.

What are the key sections in a Shareholders’ Agreement?

The key components that a well-drafted Shareholders’ Agreement should contain to ensure your business operates smoothly and efficiently with minimal risk of conflicts or misunderstandings are:

• Directorships
• Shareholder obligations
• Matters requiring shareholder consent
• Share rights
• Share transfers
• Dividends
• Restrictions

Directorships

It is common for the Shareholders’ Agreement to include clauses related to directorships. A common clause guarantees that whilst an individual remains as a shareholder, they can take place on the board (or nominate a director in their place).

Shareholder obligations

The agreement will list the contractual obligations of the shareholders, which may extend to cover areas such as tax, commitments to the company and any obligations regarding the conduct of their role as a shareholder.

Matters requiring shareholder consent

There will be certain matters in connection with the company’s administration that are so important that they should require all of the shareholders’ consent to carry out.
Therefore, it is common for there to be a schedule as part of the agreement listing these matters for the sake of certainty. This might cover fundamental aspects such as the following (amongst others):

• Change to the company’s constitution (the articles)
• Alteration to the share rights (see below)
• Variation to the company’s share capital
• Change in company name

Share rights

The Shareholders’ Agreement will usually state in each case whether the relevant shareholder’s shares have full rights (known as ‘ordinary shares’) or have reduced or differing rights in some respects.

Examples can be non-voting shares or shares that rank ahead (‘preference shares’) regarding dividends. There are other types of shares also.

Share transfers

In a private limited company, shareholders usually wish to exercise close control over who can own the shares.

This is because the companies are usually relatively small and tight-knit in terms of the ownership structure. As such, shareholders may only want a little outside influence from third parties coming into the business.

Therefore, it is standard practice for a shareholder agreement to include clauses requiring the consent of the existing shareholders for any transfer of shares.

There may sometimes be caveats to this rule regarding certain transferees, such as the spouse of a shareholder or a family trust.

Further, it is usual for the incoming shareholders to be required to sign a Deed of Adherence, which is a document confirming they will adhere to the terms of the Shareholders’ Agreement.

Dividends

The shareholders may set out their approach to dividends in the agreement.
This can be very helpful in ensuring that everybody is of a similar mindset regarding how profits will be redistributed and its related impact on the plans for growth, particularly in the early stages of the company.
This may include setting levels on dividend pay-outs as a percentage of profits and ensuring adequate provision for taxation and repayment of borrowings, etc.

Restrictions

The parties will wish to protect the company. So it is becoming common for clauses in the agreement to detail restrictions on their other commercial activities outside the realms of the company.

This is likely to include a restriction against setting up (or being involved in) a business in competition and also restrictions against poaching clients and employees. This may be especially important when investor shareholders have multiple investments and interests across various sectors and businesses.

Wrapping up

A well-drafted Shareholders’ Agreement is a crucial component of any successful business, helping to ensure that everyone is on the same page and disputes are kept to a minimum.

If you’re starting a new venture or looking to update your existing agreement, it’s important to seek the advice of an experienced corporate lawyer.

LawBite’s knowledgeable lawyers have helped thousands of entrepreneurs with their legal needs, including drafting bespoke Shareholders’ Agreements. As a Clever Formation customer, you can now access a LawBite Foundations account, which includes a £10 per hour discount on their legal advice rates and useful legal templates to get your business up and running. Find out more and sign up to LawBite.

About the author

Ashley Gurr is a commercial and contract lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.