Most shareholders know that the internal management and administration of their company is governed by the Articles of Association which are filed at Companies House and that this is a document open to public inspection.
Shareholder agreements supplement the Articles of Association. Unlike the Articles of Association which are governed by corporate law, they are governed by contract law and may be amended and ended by simple agreement and without the more unwieldy corporate law processes.
In addition, provided they do not make any amendments to the Articles of Association, Shareholder Agreements remain confidential between the shareholders and so may deal with arrangements the shareholders wish to keep confidential.
Shareholder Agreements have a number of uses for smaller companies. For example, they can document arrangements for initial funding and subsequent financing of the company, the frequency with which management accounts will be circulated, shareholder guarantees given to third parties, undertakings for confidentiality, covenants not to compete with the company and shareholders warranties and indemnities to incoming shareholders. An investing shareholder may wish to limit the debt that may be incurred by management without his or her consent or the sale of business assets with such consent.
Shareholder agreements can also be used to protect the position of minority shareholders who may not have sufficient protection under corporate law. In addition, they may deal with shareholder exit arrangements including rights of first refusal for the remaining shareholders.
Shareholder Agreements can also contain details of how shares will be dealt with in the event of a shareholder's death or divorce, including the financing and timing of a buy-back of the shares. In the event of a dispute between the shareholders they might provide for the dissenting shareholder to be bought out by the other shareholders and the event of substantial disagreement for the winding up of the company.
Shareholder agreements are very useful tools for setting out the more practical aspects of a company's internal arrangements. They can provide clarity for shareholders about the procedures for acquiring, and disposing of shares. A well drafted shareholder agreement can help prevent disputes from arising, and in the event that they do arise, can help provide a swift resolution. Your solicitor can advise you on how your company might benefit from a shareholder agreement and can draft an agreement appropriate to the needs of your company.
Disclaimer The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
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