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The significance of shareholders' agreements

The shareholders' agreement regulates the relationship between the shareholders and the management of the company. This private contract between the shareholders does not need to be filed publicly at Companies House and can detail how certain decisions should be made. While it operates alongside a company's articles of association, it is advantageous in its flexibility and confidentiality.

Though not required by law, a well-crafted shareholders' agreement provides a solid foundation for a company's shareholders by safeguarding interests, and enlisting measures to prevent potential disputes.

The value of shareholders' agreements

The shareholders' agreement should be tailored to suit the needs of the company, and in particular, thought should be given to:

• when a shareholder departs,
• when shares in the company are transferred; and
• the practical operation of the company.

Some of the key provisions of shareholders' agreements are set out below:

Voting

Typically, each shareholder will vote on a matter on a show of hands. However, decisions can be voted on in relation to the holding of voting shares, meaning that each shareholder will have one vote for each share that they hold. However, a shareholders' agreement can add specific and tailored measures and protections to voting and decision making in addition, for example, important decisions can be referred to as 'Reserved Matters' and these decisions will require 'Shareholder Consent' to approve a decision which ultimately adds a layer of control over important decisions. Shareholder Consent could be defined as requiring unanimous consent of the shareholders, or another qualified majority depending on the requirements of the shareholders.

Transfer of Shares

The default position in law is that, generally, shareholders are free to transfer their shares without any restrictions, to anyone they choose. This could potentially create uncertainty for the company if shares were transferred to a third party. Provisions can be included within the shareholders' agreement to govern how and when shares can be transferred. For example, pre-emption provisions safeguard the existing shareholders by ensuring that on a transfer of shares or issue of new shares, the existing shareholders would essentially have first refusal. A shareholders' agreement can also detail what will happen to shares in other circumstances, for example in the event of a shareholders' death. Provisions specifically dealing with voluntary and compulsory transfers can offer a clear framework to ensure the process of a departing shareholder is transparent and less contentious.

There are several other areas which are commonly addressed in a shareholders' agreement, such as the payment of dividends, the operation of the board of directors, and many more. Each company will have its own specific requirements.

Shareholders' agreements can address scenarios that businesses often overlook - the sudden departure of a shareholder, instances of incapacity, financial insolvencies, or disputes between shareholders. By addressing these contingencies at the outset, when shareholders are working together, the agreement strengthens the company's resilience and minimises ambiguities.

For more information contact David Filmer in our Corporate department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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