A shareholders’ agreement is a legally binding contract between the shareholders of a company that sets out the rights and duties of the shareholders, and it is often used to protect the interests of each individual shareholder.

It is important to note that a shareholders’ agreement does not sit in isolation, and it needs to be read alongside the company’s articles of association (“Articles”), and also alongside any service agreement or other ancillary documents e.g. loan agreements, to which the company is a party.

The Articles are governed by the Companies Act 2006 (“CA 2006”), which contains certain thresholds in respect of how decisions are to be made by a company e.g. section 168 of the CA 2006 states that the company can remove a director by passing an ordinary resolution. As this is a provision in the CA 2006, the Articles therefore cannot be drafted to impose a higher threshold, to make it harder to remove a director e.g. the Articles could not include a provision that, instead, the company can only remove a director by way of passing a special resolution (rather than an ordinary resolution).

A shareholders’ agreement is not regulated in the same way as the Articles. The shareholders’ agreement could state that the company can remove a director by way of unanimity of the shareholders; however, as this goes against the provision of section 168 of the CA 2006, the shareholders who voted in favour to remove the director could be sued for breach of contract. It is therefore important to remember that a shareholders’ agreement does not stop a company complying with its Articles, in accordance with the CA 2006. A shareholders’ agreement will not override the Articles – if there is a conflict, then the Articles will prevail.

It should also be noted that, unlike the Articles, a new shareholder will not automatically become a party to and, subsequently, bound to an existing shareholders’ agreement. The new shareholder would need to enter into a deed of adherence in order to bind the new shareholder to the existing shareholders’ agreement.

Why have a shareholders’ agreement?

• Private and confidential: it does not need to be filed at Companies House and so only the parties to the shareholders’ agreement will be aware of its terms;
• Flexible: it can be varied/amended to suit a change in circumstances;
• Clarifies rights and obligations: it outlines the rights and responsibilities of each shareholder;
• Decision-making process: it defines how key decisions will be made within the company, which can prevent conflicts and ensure smooth processes;
• Protects minority shareholders: provisions like tag-along rights protect minority shareholders from being overruled by majority shareholders. Tag-along rights enable a minority shareholder to join (and essentially ‘tag-along’) when a majority shareholder decides to sell their shareholding, ensuring that the minority shareholder exits the business on the same terms as the majority shareholder.
• Pre-emption rights: these rights grant shareholders the opportunity to purchase shares from another transferring party before they are offered to external parties. This helps to preserve ownership continuity within the existing shareholder group and ensures that shares are transferred among known and trusted parties.
• Dispute resolution: It provides mechanisms for resolving disputes among shareholders, which can save time and legal costs; and
• Transfer of shares: it sets out rules for the transfer of shares, helping to control who can become a shareholder and maintaining harmony amongst existing shareholders. This could include having the approval of all shareholders before anyone decides to sell or hold the shares.

It is important to tailor a shareholders’ agreement to suit your company’s needs, and this will vary from company to company. It is not a one-size-fits-all approach.

Overall, a shareholders’ agreement helps to maintain a fair and structured relationship amongst shareholders, which is essential for the stability and success of the company.

If you think your company could benefit from a shareholders’ agreement and you would like to discuss your requirements further, please contact a member of the corporate team.