A shareholder agreement is a must have for any company with multiple shareholders. It sets out the rights, responsibilities and obligations of the shareholders and the framework for dealing with potential conflicts. In the UK whilst shareholder agreements are not required by law, they are highly recommended to protect the company and its shareholders. This article by Darwin Gray outlines the legal requirements and things to consider when drafting a shareholder agreement in the UK.
What is a Shareholder Agreement?
A shareholder agreement is a contract between the shareholders of the company. It governs the relationship between the shareholders, how the company will be run and deals with issues such as decision making, share transfers and dispute resolution.
Why is a Shareholder Agreement Important?
Although not required by law a shareholder agreement provides clarity and protection for both the company and its shareholders. Without one the default rules under the Companies Act 2006 and the company’s articles of association will apply which may not reflect the specific needs or wishes of the shareholders.
Key Legal Requirements for a Shareholder Agreement in the UK
- Compliance with the Companies Act 2006:
- The shareholder agreement must comply with the Companies Act 2006 the primary legislation governing companies in the UK. This includes ensuring the agreement doesn’t contradict the company’s articles of association or any statutory provisions.
Confidentiality Clauses:
- Confidentiality is key particularly for private companies. The agreement should include clauses to protect sensitive company information and prevent shareholders from sharing it with third parties.
Share Transfer Restrictions:
- The agreement should outline the process for transferring shares including any restrictions. This can prevent unwanted third parties from becoming shareholders and maintain the desired ownership structure.
Minority Shareholder Protection:
- Minority shareholders are often vulnerable to being overruled by the majority. The agreement should include provisions to protect minority shareholders’ interests such as supermajority approval for certain decisions.
Dispute Resolution Mechanisms:
- Disputes between shareholders can be damaging to the company. The agreement should include a clear process for resolving disputes such as mediation, arbitration or court proceedings.
Deadlock Provisions:
- In the event of a deadlock where shareholders can’t agree the agreement should include mechanisms to resolve the impasse such as buy-sell clauses or appointing a third-party mediator.
Dividend Policy:
- The agreement should specify how and when dividends will be distributed among shareholders. This prevents disputes and ensures profits are fairly distributed according to the shareholders’ agreements.
Amendment and Termination:
- The agreement should outline the process for amending and the conditions under which the agreement can be terminated. This ensures the agreement remains relevant and effective as the company evolves.
Summary
A shareholder agreement is a must have to protect the company and its shareholders. Follow the legal requirements and include the key clauses and you’ll avoid conflicts and everything will run smoothly. Not required by law in the UK but highly recommended to protect the company and the shareholders’ investment.
