What should be covered in a shareholders’ agreement?

Harrison Drury's David Filmer gives an overview of what should be included in a shareholders' agreement.

Put simply, a shareholders’ agreement is designed to regulate the relationship between shareholders in relation to a company’s affairs.

Though the content of a shareholder’s agreement will vary depending on factors such as the size of the business and the nature of its work, it will typically cover issues such as the ownership of shares, rules surrounding being a director in the business, shareholder policies and obligations, and such things as what will happen upon the death of a shareholder.

A shareholders’ agreement will often be read in conjunction with a company’s articles of association (the constitutional document of a company) and directors’ service agreements, which are effectively a contract of employment between the company and a director.

Before getting bogged down in the legal language, the starting point is deciding on what issues the agreement should cover. Typically this will include:

Shares, shareholders and transfer of shares

The agreement should cover such issues as the proportions in which the shareholders will hold shares, if there will be different classes of shares, and if these different classes of shares will have different voting rights. It should also detail what happens when a company issues new shares and the circumstances in which a shareholder may be permitted to transfer his shares.

Directors and directors’ meetings

Where the shareholders are also the directors of the company, a shareholders’ agreement may also seek to govern the conduct of the directors.

This could include detail on the minimum number of directors required for a directors’ meeting to validly transact business, how often directors meetings take place, and who should be granted a casting vote in the event of equal voting.

Shareholder policies and consents

The shareholders’ agreement will also spell out any policies required in relation to matters such as approval of business plans, dividends, working capital, long-term finance and loan capital, and shareholders’ guarantees of borrowings.

It should also outline circumstances and situations where the consent of all shareholders is required or when a majority vote / the vote of one shareholder will suffice. Examples would be the issue of new shares, introduction of new shareholders, alterations to share capital, a change in the nature of the company’s business, expansion into new geographical areas, the signing of major contracts, or a sale of assets by the company.

Other matters

A shareholders’ agreement should also make provision for the following:

• Non-competition covenants: These are given by shareholders not to compete against the company for a specified period after ceasing to be a shareholder • Confidentiality clauses: These should be effective during and after ceasing to be a shareholder • Obligations of shareholders: This covers issues such as time to be devoted to the business by shareholders, duty to maintain insurance policies and duty to maintain control of the company’s assets, and so on • Breach of shareholders’ agreements: Covering what happens in the event of a breach. • Death of a shareholder: Details on what happens to a shareholder’s shares in the event of death • Valuation and payment shares: Detail on how shares are to be valued and how these will be paid, for example as a lump sum or in instalments

This is by no means an exhaustive list of what should be included in a shareholders’ agreement, as requirements will vary from business to business. We would strongly recommend that you always seek professional legal advice in drafting shareholders’ agreements. David Filmer Harrison Drury