The importance of a shareholders’ agreement

April 20, 2022

The importance of a shareholders’ agreement


The importance of a shareholders’ agreement

For limited companies, when it comes to making decisions, Company Law states that shareholders who own more than 50% can pass a motion at a company meeting regardless of the views of other shareholders and if shareholder(s) owns more than 75% of the shares they control the company outright and can veto the decisions of all other shareholders.

This may not suit all business situations, especially where you have two or more founders holding equal share capital or a group of owners with varying amounts of capital, some of whom are directors and some who are not, but who are all working together for the company’s success.

A shareholders’ agreement may be entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. They also govern the way in which the company is run. A shareholders’ agreement can help define how a business makes decisions to the benefit of all owners.

Typically, a shareholders’ agreement is seeking to deal with the three “D’s” of death, disability and disagreement. It may also cover a variety of other significant areas, for example, retirement and buy back of shares. Below is a list of key areas for any shareholders’ agreement; this is not a comprehensive list as each situation is different, but it may help collect the thoughts of all shareholders before an agreement is drawn up.

  1. Company details including structure, directors, and officers;
  2. Purpose and aims of the company;
  3. Equity split of shareholders;
  4. Parties to the agreement;
  5. Shareholders rights, obligations, and commitments;
  6. Decision making processes on major issues, required voting majorities and day to day operating decisions;
  7. Restrictions on the sale of shares;
  8. Rights of first refusal and pre-emptive rights to acquire shares on leaving, retirement, death or disability;
  9. Death, disability, and other retirement compensation payments;
  10. Management contracts, director approval and remuneration amounts;
  11. Insurance and other protective requirements;
  12. Professional advisers and change of professional advisers;
  13. Dispute resolution;
  14. Changes to and termination of the agreement;
  15. Buy out provisions for leaving shareholders; and
  16. Valuation of shares on changes and valuations of the business.

Shareholders’ Agreement

A shareholders’ agreement is an important document for any limited company and an equitably drafted agreement should provide comfort to all parties to the agreement.

Please talk to your Barnes Roffe contact partner if you need help in drafting an agreement, especially where there are several shareholders, a new company is being formed, a shareholder wants to sell their shares or pass them to their children, someone is nearing retirement, or the company has borrowed money from a shareholder. We can help with share and company valuations and putting the shareholders’ wishes into an agreement.