Shareholders’ Agreements

Corporate & Commercial Law

A shareholders' agreement is essentially a private contract between the shareholders of a Company which sets out their rights and obligations towards each other.

A company’s articles of association cover membership rights (they are ineffective as far as non-membership rights are concerned) and are open to public inspection. Therefore, if shareholders want to bind each other (privately) on matters which are not relevant to membership rights (such as a restrictions on borrowing; requirements for unanimity on major business decisions; agreements not to compete or poach employees or customers; agreements on dividend policy) then they would be advised to have a shareholders’ agreement in addition to their articles of association.

Many business owners realise the benefits of having a clear constitution – covering issues such as share valuation, transmission of shares on death, dividend policy and scope of authority -only too late. The effects of not having at least considered such issues when starting up a business can be disastrous. It is far better to have agreed how situations will be resolved or managed at the outset so that in the event of dispute the parties will have a clear method of resolving issues and lessening the detrimental impact on the business.

Whereas most provisions in the articles are amended with the approval of the shareholders holding 75% or more of the voting rights, a shareholders’ agreement can only be amended by unanimous agreement of its parties. Therefore, shareholders’ agreements can be a useful document to entrench minority protection provisions for the benefit of a shareholder holding a minority of the shares in the Company. A breach of a shareholders' agreement would normally entitle the aggrieved shareholder/the Company to claim damages for breach of contract, whereas an act or omission contrary to the articles does not give rise to a breach of contract – but it could mean a particular action, such as the transfer or allotment of a share, is invalid or ineffective.

Conflicting provisions between shareholders’ agreements and articles (particularly regarding provisions as to how shares are valued and what rights attach to the shares issued) can lead to messy disputes so it is important that both are reviewed to ensure that they are consistent with each other.

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