How to Draft a Shareholders Agreement in the UK?

As a business owner, you should be familiar with using shareholder agreements as a way of building your company. Shareholder agreements are a vital way of setting out the goals of your business and deciding which action to take by consulting your shareholders with voting rights. Knowing how to draft an effective shareholders agreement is an important aspect of running a company. This article will explain what a shareholders agreement is, how and when you should use one as part of your business, and how to best draft a shareholders agreement.

What is a Shareholders Agreement?

A shareholders agreement is an agreement among shareholders which usually outlines shareholder rights and duties. It can also touch on how the company should be operating and how it is to be managed. 

Often, a shareholder agreement will allow shareholders to outline how shares will be priced, especially when shares are sold. It will often include: 

• a capitalisation table; 
• restrictions on transferring shares; 
• purchasing rights of newly issued shares (to mitigate share dilution); and 
• provisions on who can become a future shareholder in the company. 

All in all, shareholder rights are protected within these agreements, which can be important in making sure that minority shareholders are not oppressed. 

What Do I Include in a Shareholder Agreement?

When drafting a shareholders agreement, the first thing you should decide is what the agreement will cover. 

It is important to keep in mind that even as a private company, you will have to draft agreements in accordance with English company law, which is mostly governed by the Companies Act 2006. This is important because it means that you must respect the rights of shareholders who already have shares. For example, if you want a shareholder to not have the right to vote, you cannot simply take away their voting rights. Instead, you will have to give them a different class of shares with fewer voting rights or find some other way to prevent them from voting.

Considering this, some common decisions that you may make with a shareholders agreement include:

• approving a change in the businesses direction;
• taking on debt to finance operations;
• deciding how to deal with business competitors;
• dealing with conflicts between directors and shareholders; and
• transferring shares to new members.

Further, it is important to be conscious of which stage your business is at when you are drafting shareholder agreements. If you are in the early stages of your business, then you may benefit from specific shareholder agreements which outline the relationship between founders and shareholders. If your business is growing, on the other hand, you may find that your shareholder agreements cover more topical issues, such as securing investment. 

Approaching the Shareholders Agreement

You should keep the interests of shareholders in mind when deciding to create a shareholders agreement. This will also be important in determining what areas the agreement will cover. Before drafting an agreement, it is useful to identify the interest of the parties to the agreement. This can include:

• voting rights;
• dividend payment rights; and
• the overall relationship between the parties; 

With the interest of each party in mind, you can then go forward and consider specific clauses. One common clause to keep in mind is the duration of the agreement clause. This will outline the length of time for which the shareholders’ agreement will be valid.

What About Director-Shareholders?

It is then important to set boundaries between shareholders and directors as to who makes decisions. In particular, you will want to have more specific provisions for any director-shareholders within your company. 

A director-shareholder is a director in your company who also has shares. This can create a conflict of interest, as the directors’ interest in their own shares can sometimes be different to the interest of the broader shareholders. Similarly, it can confuse the rules on disclosure. Disclosure is the obligation to report certain decisions to shareholders.

As a result, it is a good idea to draft a shareholder agreement with director-shareholder rights in mind, as you will want to make it clear as to what decisions they can make and in what capacity. 

To do this, you may also want to have a separate director services contract, which works similarly to an employment contract and outlines the rights and duties that the director has in their director capacity. 

Key Takeaways

As a company owner, you should consider using shareholders’ agreements to your benefit. A shareholder agreement is a legally binding agreement between shareholders on an aspect of the business. It can cover a large range of areas, including the rights and duties of individuals within the business, as well as more specific issues on how the company is going to be run. 

It is also important to draw boundaries between director decisions and shareholder decisions. When your company is in its early stages, these two categories may overlap. But as your business grows, it is a good idea to use an employment contract to outline the specific capacity of your directors. 

If you have any questions about drafting a shareholders’ agreement, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page. 

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