Being a minority shareholder in a company without the protection a shareholders' agreement provides is to be in a very vulnerable position. A shareholders' agreement is a contract setting out the terms on which two or more people are involved in a business as directors and/or shareholders. It supplements the company's articles of association and is essential to protect the position of anyone who is not the majority shareholder in the company. Without such an agreement, a company is under the control of those who hold a majority of the votes at a directors' or shareholders' meeting. Majority decisions are all very well for day to day matters, but where something goes to the heart of running the company, or materially affects the interests of individual shareholders, most shareholders want to have their say. A shareholders' agreement can specify decisions which require all, or certain shareholders to agree. Shareholder agreements vary, but the typical agreement is designed to protect all the parties against a majority using their voting power to the detriment of the others.
Provisions to protect shareholders' interests
Unless constrained by a shareholders' agreement, shareholders with a simple majority of votes (e.g. two out of three equal shareholders) have very wide powers under company law. Without requiring any consent from the other shareholders, they can appoint new directors (perhaps their friends or family members), remove any director (such as one of the other shareholders), vote to pay themselves salaries or fees which other shareholders or directors do not get or issue more shares (so diluting existing shareholders' ownership of the company). These are only examples. A shareholders' agreement would usually constrain these powers so that such things can only be done with the consent of all the parties or, sometimes, a specified majority of them.
Ensuring the parties have a say in management
Being a shareholder does not even confer the right to be a director and that is usually one of the provisions of a shareholders' agreement. Most agreements will go further by providing a list of management decisions that require the agreement of all (or a specified percentage of) the directors. Circumstances vary, but typical provisions relate to matters that are outside the usual course of the business, such as changing the nature of the business, entering into unusual contracts or contracts in which a director is personally interested, extending the company's overdraft (which often all directors have personally guaranteed), borrowing above agreed limits, employing or dismissing staff in unusual circumstances or bringing or defending legal proceedings.
One of the most important areas is the rules that apply when a shareholder wants to transfer his or her shares, and what can happen to them when the shareholder dies. These can be set out either in the articles or in a shareholders' agreement. Many companies' articles give the directors a discretion to reject any transfer by a majority decision. There are many alternative provisions, such as pre-emption provisions (giving the other shareholders a first option to buy the shares), free transfers to members of the shareholder's family or for all transfers to require the consent of all shareholders.
The Company Law Solutions service covers shareholders' agreements that are suitable for a private company with a small number of shareholders who want to protect their individual interests in the company. We strive to make our agreements straightforward and easy for all parties to understand, within the limits of legal accuracy. We start by taking details about the company, the people involved, their shareholdings and whether they are all directors. We ask what issues are important to the various parties. We advise on typical issues and solutions. A good starting point is our shareholders' agreement instruction sheet.
On the basis of these initial instructions, we produce a draft agreement, email it to the parties, seek their comments and make amendments as required. Once the final draft is settled, we produce printed copies for all the parties (if required) and advise as to the procedure for signing the agreement. A shareholders' agreement is not registerable at Companies House, each party keeps a copy signed by all the other parties.
Cost can vary according to the complexity of the agreement. Our standard service, which covers most agreements, is supplied at our benchmark price. This is the total charge in most cases. If complex additional terms have to be drafted, there may be additional cost, but we would always advise as to the actual cost before proceeding, .