Shareholders’ agreements: Key protections for growing companies

For founders, owner-managers and investors, a shareholders’ agreement can provide an agreed framework before a difficult decision, funding requirement or shareholder exit arises.

What is a shareholders’ agreement?

A shareholders’ agreement (SHA) is a private contract between a company’s shareholders and, often, the company itself.

It records the parties’ rights and obligations and sets out how important decisions will be made, including but not limited to how shares may be transferred, what happens when a shareholder wishes to leave and how disputes should be addressed.

1 – The SHA is optional

The first key difference is that an SHA is an entirely optional agreement entered into by the relevant parties. In contrast, a company is legally required to have articles of association (articles).

2 – The SHA is a private document

The articles set out the governing rules of a company’s operation, including matters such as directors’ powers, shareholder decision-making, and share transfers. A company may adopt the default model articles, or entirely bespoke articles which deal with many of the same points an SHA may cover.

This leads us to the second key difference: the articles form part of the company’s constitutional framework. Companies must have articles and, where articles are registered or amended, the relevant documents are filed at Companies House and can be accessed through the public register.

By contrast, an SHA is an entirely private contractual document. This means that foundational matters can be dealt with in the articles, which the SHA can then build on to cover additional arrangements tailored to the shareholders’ circumstances. The SHA is also ideal for dealing with commercially sensitive matters, such as detailed dividend arrangements, valuation formulas, funding obligations, exit provisions and restrictive covenants.

The two documents should nevertheless be drafted and reviewed together. If they are inconsistent, uncertainty and/or disagreements may arise about the parties’ rights and the company’s ability to implement agreed arrangements. In some circumstances, amendments to the articles may also be needed to give effect to the intended arrangements.

2 – The SHA is a contract between the parties

The Articles govern the company and its members, which means that they cannot cover some elements which the SHA can.

For example, an SHA can deal with rights specific to certain shareholders, rather than rights applying to members generally under the articles, or provisions such as restrictive covenants which are intended to bind shareholders after they cease to be shareholders.

Governance, reserved matters and deadlock

One of the key uses of an SHA is to identify “reserved matters”: significant decisions which cannot be taken without a specified level of shareholder approval, which could be set at unanimity. These might include:

• issuing shares or creating a new share class;
• changing the nature of the business;
• taking on borrowing above an agreed limit;
• entering into major transactions outside the ordinary course of business; and
• amending the Articles or SHA.

Practical considerations

A SHA should reflect the company’s ownership structure, business and future plans. SHAs are typically put in place when a business is formed, when an investor joins, during succession planning or following a dispute or near-miss.

It is also sensible to review the SHA and articles when there is a change in ownership, proposed external funding, a planned share transfer or a change to the management structure.

Having an SHA in place and reviewing it as circumstances change can provide shareholders with greater certainty and clear processes for their roles in the company.

If your company’s ownership, funding or succession plans are changing, it may be a good time to review whether your shareholders’ agreement and Articles still reflect the intended arrangements.