Shareholder Agreements – What Are They And How Can They Be Tailored To Suit?

A shareholders agreement is a private contract between the shareholders of a company.

It is used to regulate the relationship between the shareholders and sets out, amongst other things, a “back stop” position on certain matters, if the shareholders cannot agree.

While a shareholders agreement is an optional document, it provides vital protection for shareholders to provide some control over what happens if things go wrong.

Shareholders agreements are typically tailored to the specific requirements of the shareholders in question, although many contain the following example provisions:

1. Rights of pre-emption – this common provision is essentially a “right of first refusal”, which means that should one shareholder wish to sell their shares in the company, the remaining shareholders have the right to acquire the shares and prevent the possibility of an unknown shareholder becoming a shareholder in the company, which may be undesirable for the remaining shareholders.
2. Tag along provisions – such provisions act for the protection of a minority shareholder, and operate such that should a buyer wish to acquire the shares of a majority shareholder, they would also have to acquire the shares of the minority shareholder. By way of example, this means that should a buyer wish to acquire a majority shareholders 90% shareholding in a company, then the tag along provisions would require the buyer to also acquire a minority shareholders 10% shareholding. This prevents a scenario where a minority shareholder is left behind in business with an external, third party buyer.
3. Drag along provisions – such provisions act for the protection of a majority shareholder and operate such that if an external buyer wishes to acquire the entire share capital of the company, a minority shareholder cannot block a sale of the whole by refusing to sell their minority shareholding. In other words, the drag along provisions require a minority shareholder to also sell their shares to the same buyer, and will receive the same price per share as the selling majority shareholders.
4. Deadlock – such provisions set out the process for what happens in a scenario where two 50% shareholders cannot agree, and offers vital provision in any shareholders agreement involving two parties with equal ownership, preventing a scenario where possible dispute resolution is required.

The above are just some examples of provisions that can be built into shareholders agreements, but there are many more provisions which could be considered for inclusion within a shareholders agreement. Examples include, dealing with what happens to a shareholder’s shares on death, and circumstances which may trigger a compulsory transfer of shares.

Although all of the above provisions can be included within a shareholders agreement, it is not uncommon for certain provisions to be alternatively included in the articles of association of the company concerned. Accordingly, advice should be taken as to which provisions are best placed in which document on a case by case basis.

If you would like assistance in the preparation of a shareholders agreement, or a review of your shareholders agreement to ensure it is fit for purpose, then contact the Legal500 recognised Corporate and Commercial Law team on 0800 088 6004.