Shareholder Agreements

Whilst a company’s Articles of Association are available to the public via Companies House, there may be times when shareholders may deem it appropriate to make private agreements between themselves concerning certain aspects of the company. These agreements are known as Shareholders’ Agreements.

Although not made publicly available, anything included within a Shareholders’ Agreement that would otherwise need to be passed through a Special Resolution must be filed at Companies House.

The Articles and the Shareholders’ Agreement must should not be in conflict. If they are, it may be down to the courts to determine which has precedence.

When might a Shareholders’ Agreement be required in a private limited company?

Shareholders’ Agreements often concern the sale of shares.

An agreement could stipulate what should happen if one or more members wish to sell their shares. For example, the agreement might require that the other members should first have full discussion and agreement over what should happen to the shares.

There may be stipulations over how the share value shall be calculated – i.e. providing the exact basis for the appointment of a valuer.

They may also have first refusal over whether to buy those shares. This would help prevent the shares being sold to an outside party who the other shareholders do not approve of. This is known as the right of pre-emption.

Such an agreement may be executed through a Deed of Pre-Emption under which the parties concerned set out that they voluntarily agree that in the event of one or more parties wishing to sell shares that they will first offer it for purchase by the other named party/parties.

It may set out the procedure for making the offer – e.g. that the offer must be made in writing; how the offer is to be made and recorded; terms and conditions that shall apply; the length of time that the offer will stand; and what would happen in the event that the offer lapses.

All parties concerned should sign the agreement as a deed and have it witnessed.

Other provisions which may be included in a Shareholders’ Agreement include:

• Giving certain directors enhanced voting rights in the event of a deadlocked board.
• Identification of situations where the unanimous approval of the shareholders is required.
• Procedures for overcoming shareholder deadlock (i.e. in situations where the votes are equal – e.g. two 50% shareholders).
• Voluntary surrender of certain employment rights by shareholders (with shares worth at least £2,000) who are also employees. This includes areas such as claims for unfair dismissal, redundancy pay and the right to request flexible working. However, it is unlikely that anyone would choose to surrender these rights, especially if they were only a minority shareholder.

Shareholders’ Agreements and the Articles of Association should be in harmony. If there is a conflict one or the other should be amended to ensure consistency. Remember, changes to the Articles of Association require a Special Resolution of the shareholders and 75% of the votes cast. Changes to the Agreement will require an ordinary majority of shareholders.