Home » How to Make a Shareholder Agreement: A Step by Step Guide

How to Make a Shareholder Agreement: A Step by Step Guide

by MarketMillion

Shareholder agreements are a must have document that governs the relationship between a company and its shareholders, setting out rights, obligations and dispute resolution processes. This guide will take you through the process of how to create a shareholders agreement so that minority shareholders and majority shareholders are treated fairly and the company structure and management is clear.

Whether you are setting up a new company or modifying an agreement for existing shareholders this guide will help you create a comprehensive shareholders agreement that protects everyone’s interests. Let’s get started with the key components of a shareholders agreement and the steps to follow when drafting one. For expert legal advice, consulting with experienced professionals such as Darwin Gray Solicitors can ensure that your shareholder agreement is legally sound and fully protects all parties involved.

Shareholders Rights

Shareholders’ rights are essential to ensure transparency, fairness, and influence over a company’s decisions. Key rights include voting on major issues like electing board members, approving changes to the articles of association, and deciding on mergers or share transfers. Shareholders are entitled to dividends when declared, access to key company information, and pre-emptive rights, which allow them the first option to purchase new shares before they are offered to outsiders. They also have the right to transfer their shares, though private companies often impose restrictions on this. Minority shareholders are protected against unfair treatment by majority shareholders, and all shareholders have the right to participate in critical decisions, such as significant business expansions, issuing new shares, or amending the company’s articles. Fair treatment of all parties is ensured by a well-drafted shareholder agreement, which also outlines the resolution of disputes and the process for transferring or selling shares.

1. What is a Shareholders Agreement?

A shareholders agreement is a written agreement between a company and its shareholders, setting out their rights and obligations. It sits alongside the company’s articles of association and provides more detail on shareholder interactions and dispute resolution.

Unlike the articles of association which is a public document filed at Companies House a shareholders agreement is a private contract between the parties and remains confidential. It covers topics such as voting rights, transfer of shares, dispute resolution and shareholder loans.

2. Why Do You Need a Shareholders Agreement?

Without a shareholders agreement misunderstandings and disputes between existing shareholders or between new shareholders and existing shareholders can quickly get out of hand and damage the business. A shareholders agreement provides a framework for resolving issues such as:

  • Transfer of shares when a shareholder wants to sell their shares.
  • How major decisions are made.
  • Protecting minority shareholders from being treated unfairly by majority shareholders.
  • Reserved matters that require unanimous or majority consent.

In short a shareholders agreement ensures everyone knows their roles and obligations and reduces conflicts.

3. Key Components of a Shareholders Agreement

A good shareholders agreement should cover the following:

Ownership and Share Capital

Define each shareholder’s stake in the company by outlining their ownership percentages and share capital structure. This will show how much control each shareholder has over the company’s decisions.

Voting Rights

What are the voting rights for each shareholder’s shares. Ordinary shares usually have one vote per share but some decisions may require approval from specific types of shareholders e.g. majority shareholders or unanimous consent from all shareholders.

Reserved Matters

Some decisions need to be agreed by a certain percentage of shareholders, often referred to as reserved matters. These might include amending the articles, issuing new shares or acquiring another company. By including these in the agreement you ensure major business decisions are thoroughly considered and agreed by all parties.

Share Transfers and Exit Clauses

Set up a framework for how shares can be transferred especially when a shareholder wants to exit the company. Pre-emptive rights often give existing shareholders the right of first refusal to buy shares before they are offered to third parties. This maintains the balance of ownership and control in the company.

The agreement should also cover how shares are valued, can shares be transferred to other shareholders and what happens if a shareholder dies or becomes incapacitated. This is especially important in a private company limited by shares where ownership is not as transferable as in public companies.

Dispute Resolution

To avoid conflicts disrupting the business include a clear process for resolving shareholder disputes. This can be mediation, arbitration or in some cases legal proceedings. Agreeing on a process for resolving disputes upfront saves time, money and potential damage to the company’s reputation.

Rights of New Shareholders

When bringing in new shareholders the agreement should cover how they will be integrated into the company. This might include share allocation terms, financial assistance and how their involvement will affect the existing shareholder structure. New shareholders should know their role, rights and obligations before signing anything.

4. How to Draft a Shareholders Agreement

Now you know the key components of a shareholders agreement here’s how to make one step by step:

Step 1: List the Shareholders

Start by listing the company’s current shareholders and their shareholdings. Make sure everyone who owns shares in the company is involved in the agreement drafting process whether they are minority shareholders or majority shareholders.

Step 2: Get Legal Advice

While you can draft a shareholders agreement yourself it’s recommended you get a lawyer or solicitor such as Darwin Gray Solicitors, who knows company law. A lawyer can ensure your agreement complies with Companies House regulations and doesn’t conflict with the company’s articles.

Step 3: Set the Terms and Conditions

Using the above key components draft the shareholders agreement to fit your company’s needs. This might include voting rights, how shareholder meetings are held and how shareholders agree major business decisions.

Step 4: Dispute Resolution Provisions

Clearly state how disputes between shareholders will be resolved. Whether through mediation or arbitration these provisions prevent disputes from escalating into full blown legal action.

Step 5: Intellectual Property and Confidentiality

If your business has intellectual property you’ll want to include clauses to protect those assets. A confidentiality clause will ensure company shareholders don’t disclose company information to outsiders without written notice or board approval.

Step 6: Review and Update

As the business changes the shareholders agreement should be updated to reflect new shareholders, changes in shareholdings and other relevant factors. Review the document regularly to keep it current and relevant to the company.

5. Legal Stuff

When drafting your shareholders agreement make sure it doesn’t conflict with your company’s articles of association or other legal obligations. If you don’t it could cause problems at board meetings or legal challenges from shareholders.

Also remember a shareholders agreement doesn’t need to be filed at Companies House so it’s a private agreement. But once signed by all shareholders it’s legally binding and can be used in legal proceedings if there’s a material breach of the terms.

6. Shareholders Agreement Issues

Here are some of the issues that may arise when drafting or enforcing a shareholders agreement:

  • Fair and reasonable pricing of shares when transferring.
  • Disagreements over reserved matters or certain transactions.
  • How to deal with shareholder warrants or new share issuance.
  • Minority and majority shareholder rights during decision making.

By addressing these in your shareholders agreement you’ll ensure all parties are treated fairly and the company remains stable in the event of shareholder disputes or changes in ownership.

Summary

Drafting a shareholders agreement is an essential step in protecting the interests of the company and its shareholders. By including the key components of ownership percentages, voting rights, dispute resolution and share transfer process you’ll have a document that ensures smooth company operations and fair treatment of all shareholders.

Consult with legal experts when drafting and review regularly to reflect changes in the company structure or ownership. With a good shareholder agreement you’ll protect the future of your company and everyone will be on the same page.

For further information, consult a legal professional specialising in shareholders agreements or corporate governance to ensure your agreement is legally sound and effective.

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