Shareholders of a company have a significant amount of freedom in fashioning the company’s constitution. This facilitates the introduction of a significant element of “private ordering” into the rules governing a company’s operations. The articles of association are, however, not the only means by which shareholders can develop their own rules for corporate governance. An alternative mechanism is the shareholders’ agreement.
WHAT IS A SHAREHOLDERS’ AGREEMENT (SHA)?
A shareholders’ agreement is a private contract between the shareholders of a company outlining their rights and obligations to each other. A shareholders’ agreement is a private document which is not filed at Companies House, unlike a company’s articles of association. As a general rule, shareholders’ agreement is not normally treated as part of the company’s constitution. In order to obtain that title, all the members of the company must be part of the agreement under the CA 2006 s. 29(1).
The SHA will bind all of the parties to the it and provide a remedy if one of its terms is breached. An SHA contains provisions commonly found in the company’s articles of association, as well as, provisions pertaining to distribution policy, minority protections and confidentiality. The SHA complements the articles of association. If the articles are silent on any particular term, a shareholders’ agreement prevails unless in conflict with statutory provisions.
The purpose of a shareholders’ agreement is to apportion control fairly between a company’s shareholders. Although a shareholders’ agreement cannot prevent disagreements between shareholders, it does define the shareholders parameters as to how to carry out the day to day business of the company, whereas there are many cases where shareholders fall out.
IMPORTANCE OF A SHAREHOLDERS’ AGREEMENT:
The main importance are privacy and protection. Where shareholders’ agreement could require the unanimous consent of all shareholders to make certain decisions. Since, in case of conflict between the articles of association and the shareholders’ agreement, sometimes the provisions of the shareholders’ agreement will prevail.
In addition, a shareholders’ agreement may cover the right for a specified individual to be appointed a director, which is a personal right. It is not enforceable if included in the company’s articles. By including the right to be appointed in the agreement, the shareholders would be able to seek damages or an injunction for breach of contract if other shareholders breached the agreement and did not appoint them as a director.
ESSENTIAL CLAUSES IN A SHAREHOLDERS’ AGREEMENT:
A shareholders’ agreement could provide for essential provisions namely: Restrictive Covenant and Lock-in Period clauses.
Restrictive covenant provision protects the company if it intends to establish an ongoing business. The provision may contain restrictions, which limit the extent to which the shareholders are permitted to compete with the business of the company and to solicit its customers, employees or suppliers.
Lock-in Period pertains to an initial period (lock-in period), during which the shareholders should not transfer or dispose of their shares without the consent of other shareholders. This provision protects the company during its establishment period, thereby ensuring that shareholders have sufficient time to get the business up and running prior to exiting the company.
SUMMARY:
It is important to periodically review your company’s constitutional documents to ensure they are suitable for your needs and your objectives. Please contact our corporate lawyers to get tailored legal guidance.
DISCLAIMER:
The following legal disclaimer applies to the article prepared by SteelRose Legal and is intended for informational purposes only. By accessing or using the article, you acknowledge and agree that the article is not intended to provide legal, financial or professional advice of any kind. The information contained in the article is general in nature and may not be applicable to your specific circumstances. It is recommended that you seek independent professional advice tailored to your individual situation before making any decisions based on the information contained in the article.