{"id":4584,"date":"2022-06-29T06:48:45","date_gmt":"2022-06-29T05:48:45","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=4584"},"modified":"2025-07-02T00:41:20","modified_gmt":"2025-07-01T23:41:20","slug":"key-terms-shareholder-agreement","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/corporations\/key-terms-shareholder-agreement\/","title":{"rendered":"Key Terms to Include in a Shareholder Agreement in the UK"},"content":{"rendered":"

A shareholders agreement is a private contract between a company\u2019s shareholders. Its purpose is to provide an additional layer of protection, particularly to minority shareholders, and functions to supplement company law. In other words, a shareholder agreement is a contract between individuals and not the company itself. As a private contract, shareholder agreements can create additional obligations and rights between individuals that company law cannot. This article will examine the key terms contained in most shareholder agreements. It will also offer a commercial evaluation of their effect.<\/span><\/p>\n

General Drafting Considerations\u00a0<\/span><\/h2>\n

Shareholders should draft shareholders’ agreements (<\/span>SHA<\/b>) in conjunction with the <\/span>company\u2019s articles of association<\/span><\/a>. Where possible, shareholder rights should be included both in the company\u2019s articles and the SHA. This gives an aggrieved shareholder two causes of action:\u00a0<\/span><\/p>\n

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  1. a claim for a breach of the company\u2019s constitution; and\u00a0<\/span><\/li>\n
  2. breach of contract<\/span><\/a>.\u00a0<\/span><\/li>\n<\/ol>\n

    In most cases, where an aggrieved shareholder can bring a claim under both causes, a breach of the company\u2019s articles is superior. This is because a court will usually have more powers to grant relief where shareholders\u2019 rights in the company are breached rather than through a simple contract.\u00a0<\/span><\/p>\n

    However, articles only govern rights between and among shareholders, directors, and the company. Articles cannot create obligations that exceed the rights and obligations available under company law. In this case, a term contained in the SHA will create a cause of action that company law cannot recognise.\u00a0<\/span><\/p>\n

    \n

    While an SHA acts as a contact, all the parties to the contract should execute it as a deed\u00a0<\/span><\/p>\n<\/div>\n

    Key Terms\u00a0<\/span><\/h2>\n

    The following is an evaluation of some key terms. It does not include all possible terms you may find in an SHA.\u00a0<\/span><\/p>\n

    Parties\u00a0<\/span><\/h3>\n

    Each shareholder will ideally be a party to the contract. Likewise, the SHA should list the name and address of each shareholder.\u00a0<\/span><\/p>\n

    You should take care when including the company as a party to the contract. While the law may recognise this in some cases, you risk imposing a term on the company that is at odds with the company law. If this happens, the law will not recognise the term. This could invalidate the SHA.\u00a0<\/span><\/p>\n

    Company Background\u00a0<\/span><\/h3>\n

    This term indicates the company in question and information on its share capital. It will also include, by reference to a schedule, the class and number of shares each shareholder holds.\u00a0<\/span><\/p>\n

    Definitions<\/span><\/h3>\n

    Definitions define specific words and phrases and keep the agreement as concise and readable as possible. Most SHA will include definitions of shareholder consent and excluded shareholder.\u00a0<\/span><\/p>\n\n\n\n\n
    Shareholder Consent<\/strong><\/td>\n\n

    Certain matters may require the consent of a certain number of shareholders. In practice, the SHA will require consent to be unanimous (or 95% of the nominal value of shares held). This is because, under company law, a <\/span>special resolution<\/span><\/a> requires a 75% threshold. The articles can require most matters to be voted on via special resolution, but the articles cannot stipulate a threshold higher than this.\u00a0<\/span><\/p>\n

    By requiring certain matters, such as the appointment and removal of directors, to exceed the threshold imposed by company law (75%), you can improve\u00a0<\/span>protection for minority shareholders<\/span><\/a> that majority shareholders might otherwise outvote in a special resolution.\u00a0\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

    Excluded Shareholder<\/strong><\/td>\nThe company\u2019s entire share capital includes the pool of shares that contribute to the requisite threshold of shareholder consent. In some cases, you may wish to exclude certain shares from this pool (e.g. shares of a particular class). You should specify this by defining any excluded shareholders.\u00a0<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Business of the Company\u00a0<\/span><\/h3>\n

    It is also worth including a term relating to the scope and extent of the company\u2019s business. This term ensures that your company reaches a specified shareholder consent threshold before you can approve changes to the business.\u00a0<\/span><\/p>\n

    Shareholder Obligations<\/span><\/h3>\n

    Additionally, you can specify certain measures that require the parties to the SHA to vote against their capacity as shareholders. An exception is if the company meets shareholder consent under the SHA.\u00a0<\/span><\/p>\n

    The effect of this is that shareholders must vote against certain measures listed in this clause if proposed at a shareholder meeting, such as appointing or removing directors. However, shareholders can all separately agree to modify the SHA. If they do not, this provides a cause of action under the SHA.\u00a0<\/span><\/p>\n

    Dividend Policy\u00a0<\/span><\/h3>\n

    This term sets out the company\u2019s general dividend policy. This is a powerful term because, under company law, the company\u2019s directors have the power to authorise a share dividend. Shareholders cannot compel directors.<\/span><\/p>\n

    The effect is that, insofar as any directors are also parties to the SHA, they must comply with dividend policy. Otherwise, the aggrieved shareholders could sue the offending director(s) for breach of the SHA. Importantly, this term cannot require directors to issue unlawful dividends.\u00a0<\/span><\/p>\n

    Transfer of Shares\u00a0<\/span><\/h3>\n

    There are many reasons founders would want to restrict when a shareholder can and cannot transfer shares to a non-shareholder. Therefore, this term can set out the conditions when a party to the SHA can transfer their shares to a non-shareholder. For instance, you might want to stipulate that no shares can be transferred other than to close family members.\u00a0<\/span><\/p>\n

    Issue of New Shares<\/span><\/h3>\n

    Likewise, the founders may wish to limit the instances where a company can create new shares and issue them to either existing shareholders or new ones.\u00a0<\/span><\/p>\n

    Restrictions on Parties\u00a0<\/span><\/h3>\n

    This term will usually include <\/span>non-compete agreements<\/span><\/a> (NCAs), which will specify:<\/span><\/p>\n