Key Terms to Include in a Shareholder Agreement in the UK

A shareholders agreement is a private contract between a company’s 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.

General Drafting Considerations 

Shareholders should draft shareholders’ agreements (SHA) in conjunction with the company’s articles of association. Where possible, shareholder rights should be included both in the company’s articles and the SHA. This gives an aggrieved shareholder two causes of action: 

1. a claim for a breach of the company’s constitution; and 
2. breach of contract. 

In most cases, where an aggrieved shareholder can bring a claim under both causes, a breach of the company’s articles is superior. This is because a court will usually have more powers to grant relief where shareholders’ rights in the company are breached rather than through a simple contract. 

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. 

Key Terms 

The following is an evaluation of some key terms. It does not include all possible terms you may find in an SHA. 

Parties 

Each shareholder will ideally be a party to the contract. Likewise, the SHA should list the name and address of each shareholder. 

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. 

Company Background 

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. 

Definitions

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. 

Business of the Company 

It is also worth including a term relating to the scope and extent of the company’s business. This term ensures that your company reaches a specified shareholder consent threshold before you can approve changes to the business. 

Shareholder Obligations

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. 

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. 

Dividend Policy 

This term sets out the company’s general dividend policy. This is a powerful term because, under company law, the company’s directors have the power to authorise a share dividend. Shareholders cannot compel directors.

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. 

Transfer of Shares 

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. 

Issue of New Shares

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. 

Restrictions on Parties 

This term will usually include non-compete agreements (NCAs), which will specify:

• which activities are restricted (e.g. employment, shareholding, or holding the office of director in another company); and 
• for how long the restrictions last (e.g. six months).

Directors

Additionally, your SHA should specify how directors will be appointed or removed. 

Confidentiality

A confidentiality term will specify what information shareholders cannot publicly disclose. This term can include restrictions on discussing the terms of the SHA itself. 

Termination of SHA

A termination clause will specify the circumstances that will render the SHA null and void. Common circumstances include:

• the winding-up of a company; 
• the company going public; and  
• unanimous consent under the SHA.

This provision should also specify which terms remain in force after termination of the SHA and for how long. 

Key Takeaways 

A shareholder agreement can impose obligations and create rights that company law will not automatically recognise. Therefore, shareholder agreements are powerful tools, especially when it comes to protecting minority shareholder rights. Common terms found in shareholder agreements include:

• limits on when the company can issue shares; 
• restrictions on the transfer of existing shares; 
• the eligibility of shareholders to become directors; 
• restrictions on the appointment and removal of directors; 
• confidentiality; and  
• non-compete agreements. 

If you need help drafting a shareholder 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 on 0808 196 8584 or visit our membership page.

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