Shareholder Agreements

Our expert team is highly experienced in helping with the creation of bespoke shareholder agreements that meet the needs of all involved. We can provide pragmatic advice to ensure any such agreement correlates with your objectives and expectations, and has your best interests at its core.

Find out more about how our shareholder agreement solicitors can help you by getting in touch today. Simply call us on 0345 901 0445 or complete our online enquiry form and a member of the team will be in contact to discuss matters further.


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Why Have Shareholders’ Agreements?

When setting up a company with family, friends, or other professionals you have known for a long time, it is very easy to assume that nothing can go wrong in the future. You trust one another and therefore you probably assume that you don’t need to think about putting any protections in place in case things do go wrong. You also might feel a little uncomfortable suggesting that your new business partners enter into something akin to a pre-nuptial agreement.

Hopefully nothing will go wrong BUT friends, family and business partners do fall out. If you do not seek to protect yourself, you could lose out. Or your friendship could suffer irredeemably. Or you could end up involved in costly litigation.

The company’s constitutional documents, the articles of association, will help to some extent, but are unlikely to offer a shareholder full protection. A well drafted and thought through shareholders’ agreement can regulate your relationship in order to protect you and provide assurance to you all that various scenarios have been considered and catered for. Often one partner feels that they have put many more hours in than the other and if you have a shareholders’ agreement, this can usually be easily resolved.

It is hoped that even if you do have a shareholders’ agreement drawn up, you won’t need to rely on it but if you haven’t put one in place it would be a shame to be in the position of wishing that you had! It is much easier to agree the terms of the shareholders’ agreement before you start making money than afterwards, as naturally people become more protective and in turn difficult about the terns of the relationship Protect the business and protect your investment in the business.

What is a Shareholders’ Agreement?

It is an agreement between all or some of the shareholders in a company. It seeks to protect the shareholders’ investment in the company, to set out the working relationship between the shareholders and to govern how the company is run.

The agreement will:

  • Set out the shareholders’ rights and obligations;
  • Regulate the sale of shares in the company;
  • Describe how the company will be run;
  • Protect minority shareholders and the company;
  • Define how key decisions will be made.

The agreement will contain rules which regulate the relationship between the shareholders. Protections for both minority and majority shareholders can be included.

How does a Shareholders’ Agreement Help a Minority Shareholder?

If you hold less than 50% of the shares in a company, you are a minority shareholder and you will generally have little or no say in the running of the company. As companies are generally run by majority decision, even if the articles purport to protect the minority shareholders, articles can be changed by passing a special resolution at a meeting of the members (special resolutions can be passed if 75% of the holders of shares vote in their favour). There are some laws in place which provide protection to minority shareholders.

Statutory Shareholder Protections:

Unfair prejudice – S.994 of the Companies Act 2006

Shareholders can apply to court to claim unfair prejudice if they think that the company is being run in a way which is unfairly prejudicial to some of the shareholders. The request would be for the Companies Court to correct that behaviour. For example, failing to pay declared dividends, undertaking activities which are not permitted under the company’s articles or doing something which might result in the company’s insolvency, are all things which might justify an application. It is necessary to act quickly with one of these claims because the court will reject an application where the shareholder has allowed things to run on, as the court will regard this as acquiescence in the action taken by the Director/s.

If an application is made, the shareholder may be required to sell his/her shares to the remaining shareholders by the court as a way of resolving the matter if this is practical. There are other issues for the court to consider when dealing with the application and these include the shareholder’s own conduct.

These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision. Quite often, one or more of the shareholders leave with a package.

The so-called ‘derivative action’ – S.260 of the Companies Act 2006:

In some circumstances a shareholder can ask the court to prevent some action being taken by the Directors which is harmful to the company or make a claim against them for any loss suffered by the company as a result of that action. The claim must be made by the shareholder on behalf of the company, not on the shareholder’s own behalf, as it is the company which is suffering the wrong. Of course the harm done to the company may well also harm the shareholder indirectly, usually because there will be a reduction in profits or the company might fail.

For example, if the company were to enter into a contract with another company which was owned by one of the Directors and this would be much less favourable than a similar contract with another, unconnected, business, then the company will suffer as its profits will be reduced. The director in question would make a personal profit at the expense of the company.

These claims are rare because although the shareholder can issue the court proceedings to get things going, the court must give permission for the claim to continue to trial. Permission is not easy to obtain.

The shareholder will get no direct benefit by going to court but the company will be protected and that helps the shareholder in the long run, as it protects the shareholder’s interest in the company.

S.122 of the Insolvency Act 1996:

This is the nuclear option in shareholder disputes and involves an aggrieved shareholder asking the court to wind up the company and bring it to an end. Usually the shareholders’ differences have become irreconcilable. The company will be wound up and if there is anything left after the creditors and liquidator have been paid, it will be distributed between the shareholders. They will go their separate ways.

Not every aggrieved shareholder will be able to justify a winding up petition to the court and there will have to be strong reasons for believing that the company can no longer continue. The shareholder must demonstrate that there will be a tangible benefit in making a winding up order. If there is some alternative remedy, which would allow the company to continue, the shareholder may find that the court refuses to make the order.

If a company is formed by two friends with complementary skills and they fall out, leaving the company unable to continue with only one of them, the underlying basis of the company will have gone. Alternatively, there may be deadlock between the shareholders which cannot be resolved in any other way.

However, if the company is in financial difficulties a creditor may issue a petition under S.122 anyway, whatever the shareholders may want.

In order to avoid having to rely on the statutory protections…

If you are a minority shareholder, the shareholders’ agreement can be drafted in such a way that certain decisions need unanimous shareholder approval, for instance, the issue of new shares, appointment or removal of directors, taking on new borrowings or changing the main business of the company.

We would not recommend that you include all company decisions in the “unanimous” box as this may prevent the company from actually carrying on any business at all.

Investment protection upon sale…tag along…

As a minority shareholder you may want a provision to be included in the shareholders’ agreement which requires that, upon the majority shareholder receiving an offer for his/her shares, you as the minority shareholder must be offered the same offer for your shares. This is often referred to as a “tag-along” provision.

How does a Shareholders’ Agreement Help a Majority Shareholder?

Drag along…

As a majority shareholder (more than 50% of shares), you may want to sell your shares but a minority shareholder is unwilling to agree, then you can include a provision in the shareholders’ agreement which forces the minority to sell their shares. This will allow you as the majority shareholder to realise your investment at a time and price that suits you. The price offered for the shares must be fair for all shareholders, including the minority.

As a majority shareholder you may also want to prevent the minority shareholders from setting up a rival business to the company’s business or passing on any confidential information about your company to any potential competitors. Both of these can be provided for in the agreement.

If you would like to include restrictions on the transfer of shares, this can be provided for in the agreement – for instance, not allowing sale to a competitor or any other individual who is not involved in the running of or who would not have any interest in the business.

Shareholders’ agreements can be drafted to cover rules about how and to whom shares can be transferred, on what terms and at what price.

When to put in place a Shareholders’ Agreement?

We would recommend that you enter into a shareholders’ agreement when you set up your company and issue the first shares. You will also be putting in place the company’s constitution at that time (the articles). It is a good time to have a discussion about how the business should be run and what the expectations of the shareholders are with relation to the investment they are putting into the business. If it is straightforward to put together a shareholders’ agreement that should bode well for the future. If you can’t agree on what to include that should set alarm bells ringing! If you leave it until the business is more established, it could be even trickier to reach agreement.

What should be included?

The main areas you should think about including are as follows:

  • Running the business: appointing, removing, remunerating directors; financing arrangements; banking arrangements; how directors will communicate with shareholders about performance;
  • Paying dividends;
  • Issuing and transferring shares; valuation; restrictions on transfers;
  • Minority (less than 50%) shareholder protections – certain major decisions should require unanimous shareholder approval;
  • Restrictions on shareholder involvement in competing businesses;
  • How to resolve disputes.
  • Good/Bad leaver clauses – set out terms of transfer of all or some of the shares of a departing director-shareholder to the remaining ones based on the reason for departure.
  • If a founder is also employed as a director of the company, he or she has employment rights, which are quite separate to shareholder rights. Good leaver/bad leaver clauses provide a mechanism to tie the end of employment with the end of share ownership.
  • Good leaver clauses provide incentives to founders who are important to the business to stay working in it until milestones are reached, while bad leaver clauses act as a deterrent to leaving early or breaching another contract (such as a director’s service agreement).
  • Leavers of both types can be defined by actions as broadly or as narrowly as the shareholders like, with one being the remainder of actions that the other isn’t. Typically, actions that would define a good leaver would be:

• death

• mental or physical incapacity that doesn’t allow the founder to continue working

• redundancy

• departure following change in the remuneration, duties or role of the founder as an employee

• the achievement of a particular event

• other shareholders may also be able to agree that a leaver is a good one at their discretion.

  • Retirement may also be an action, but since there is no longer a default retirement age, retirement as an action may be discriminatory against other non-departing shareholders.
  • A bad leaver may have acted in such a way as to damage the business – with evidence of loss likely to be already apparent. The definition of a bad leaver might be tied to actions

• fraud

• dismissal from employment for gross misconduct or any other reason that is not unfair or constructive

• exceeding limits of authority

• disqualification as a director

• breach of the shareholders’ agreement

• failure to achieve certain targets before voluntarily leaving employment

  • A bad leaver clause may seek to penalise the founder for his or her actions, by forcing the sale of his or her shares at a discount to the current valuation. All shareholders should be aware that this may not be sufficient to compensate others for losses as a result of the actions of the departing shareholder, and that it may not be possible to pursue the leaver for further damages. In other words, these type of clauses do not provide insurance.
  • There may be several types of bad leaver, with different rules associated with each. The provisions don’t have to be as black and white as “good” or “bad”. Bad leavers are often named as “early” leavers in order to remove the negative connotations of leaving under what are perfectly reasonable circumstances.

The terms of a shareholders’ agreement will often overlap with other company formation documents, like the articles. The articles will often contain provisions relating to the making of decisions, holding of meetings and transfer of shares. In order to ensure your shareholders’ agreement and your company’s articles are consistent, feel free to contact us for advice.

Our Approach

Renowned for our professionalism, close attention to detail and determination to get the very best for our clients, Blackstone is the ideal law firm for advising on shareholder agreements. We will help ensure everything in your agreement is correct and proper and achieves all that you want it to.

We are experienced in providing assistance with all manner of arrangements on behalf of shareholders and investors, and will help to ensure any agreement is correctly tailored in order to properly govern the important relationships between all shareholders and investors, and their relationships with the company itself.

Why Legal Help is Important

The details of a shareholder agreement are extremely important to all parties involved. Such agreements are legally binding arrangements that govern the relationships between shareholders. It is therefore highly recommended not only that shareholders put such an agreement in place, but that they do so with the help of an expert legal team to advise on best practice.

Shareholder agreements can serve many purposes, including:

  • Ensuring the responsibilities and authority of the directors are clear
  • Laying out the rules for different classes of shares
  • Ensuring the management of the company is properly set out
  • Describing how shares can be issued and transferred
  • Ensuring transparency between shareholders
  • Detailing what should happen if a shareholder wishes to exit
  • Clarifying the rules (what is and is not permitted)

Importantly, a shareholder agreement can play a key role in making sure any potential conflict between shareholders is avoided.  This, in turn, helps to ensure the smooth running of a business and gives it the best opportunity to thrive. Seeking expert legal help is invaluable because it ensures the agreement is as fair and effective as possible.

Our Services

We can provide support to all parties involved in a shareholder agreement, ensuring their best interests are at the forefront of the negotiations. For example, we can help if you are:

  • An existing shareholder
  • An investor
  • Involved in a joint venture
  • Involved in a private equity transaction
  • Involved in a start-up business

Get in Touch

For more information about the services we offer and to speak to a shareholder agreement solicitor about the assistance we can provide, get in touch today. Either call us on 0345 901 0445 or allow us to give you a call back by leaving your details via our online enquiry form. Our offices are located in Cheshire and London, meaning we are able to assist people from across the North West, including Manchester and Chester, as well as throughout the rest of the UK.

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