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A shareholders agreement is an agreement between the shareholders of a company governing the business relationship between the company and each of its shareholders. It is used to ensure that the company only operates and trades in the manner envisaged by the shareholders. It can also be used to put restrictions on the way shareholders can dispose of or otherwise deal with their shares.
Many of the restrictions on the operation of the company and dealings in shares are also appropriate to put into the company's articles of association. The distinction between the two documents is subtle but important. A company does not have the power to act outside the provisions of its articles of association and it is common for the articles to prevent certain dealings in shares and any transfer of shares in contravention of the articles will be ineffective. Common matters covered by a shareholders’ agreement include:
Restrictions on the nature of the business of the company
An entitlement for a shareholder to be a director of the company or to appoint or remove a nominated director
Matters which require the consent of all or a specified percentage of the shareholders, for example, sales and acquisitions of assets beyond a certain value, borrowing money, opening new bank accounts
Apportionment of the liability between shareholders for any personal guarantees they may have
Restrictions on the issue of new shares, the transfer of existing shares and options for the shareholders to acquire each other’s shares in certain and distinct situations
Provisions for what is to happen on the retirement, death or incapacity of a shareholder
Provisions to prevent shareholders from competing with the business of the company
The policy for the payment of dividends and the circumstances when that policy may be changed
The lack of shareholder agreements on company formations has become one of the fastest growing areas of litigation for commercial solicitors. Fallouts within a company consisting of husbands and wives, families and friends happen far more regularly than most people envisage. Derivative Claims under the Company Law Act 2006 have become extremely expensive to initiate.
We strongly advise all investors in a company to put a shareholder agreement in place. KJL Solicitors will provide individually tailored shareholder agreements on your behalf.