Share Holders Agreement

The agreement works in conjunction with a company’s articles of association, but will give shareholders greater protection than can be provided by the articles alone, not least because companies are often set up quickly and cheaply just with standard articles that will not include much detail regarding protective provisions for shareholders or define the limits of their responsibilities.

Ordinarily a company is subject to control in accordance with the comprehensive body of company law (contained in both statute and case law) that governs how a company should be run. However, a shareholders’ agreement can contain any arrangement agreed between the shareholders and can vary what would otherwise be the legal position without it.

Unless agreed to the contrary in a shareholders agreement, the management of the company is determined mostly by the board of directors, while certain key decisions (particularly anything relating to ownership) are required to made by the shareholders in general meetings (or by written resolution). Therefore an agreement is important to fully determine the basis for important decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

As opposed to articles of association which is a public document made available at Companies House, the shareholders agreement will remain private and confidential and will not be open to view by others such as creditors or non-member employees.

Having a shareholders agreement is a cheap way to minimise any potential for business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.

The existence of a shareholders agreement can assist in raising finance from banks or creditors and also demonstrates the stability of the business to other potential partners.

It prevents situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company, safeguarding each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of the death of a shareholder.

A shareholders agreement protects the rights of minority shareholders and the investment value of their shareholding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place a shareholders agreement can only be amended with the agreement of all of the shareholders whereas the company’s articles of association can be changed by a 75% majority meaning that a shareholders agreement provides better protection for minority shareholders.