Where shareholders are called to make a decision, company law provides that the votes of a majority (or in certain cases 75% of the votes) will prevail. A minority shareholder’s influence may only be enough to block a resolution of the majority shareholders.
Shareholders’ agreements provide shareholders with an opportunity to set out their contractual rights and obligations between themselves and between them and their company. This allows you as a shareholder to safeguard against certain matters important to your investment, over and above the protection provided by the company. The key features of shareholders’ agreements are as follows.
Positive obligations
Certain provisions will impose positive obligations on you as a shareholder regarding voting agreements. The shareholders can bind themselves with each other to exercise their votes as shareholders to put into effect their agreed intentions. These may relate to how the business will be funded and its levels of borrowing, how your company will be run (i.e. the composition of the board of directors) and developed, including the activities your company will carry out.
Minority shareholder protection
One key feature of a shareholders’ agreement is that it can be drafted to protect the rights of minority shareholders and the investment value of their shareholding. Without an agreement, majority shareholders may force issues that are not in the minority shareholders’ interests. Once in place a shareholders’ agreement can only be amended with the agreement of all of the shareholders whereas the company’s articles of association can be changed by a 75% majority meaning that a shareholders’ agreement provides better protection for minority shareholders.
Shareholders’ agreements can contain any arrangement agreed between the shareholders and can vary what would otherwise be the legal position without it. Therefore an agreement can govern the basis for decision making, to restrict the power of the directors where necessary and to provide protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders. Without a shareholders’ agreement a company is subject to control in accordance with company law meaning the voice of the minority shareholders is not always heard.
Rights of veto
Shareholders’ agreements reduce the potential for conflict between shareholders and help the company to be run smoothly with rights and responsibilities of the shareholders clearly set out. There is clarity and certainty as to what can or cannot be done and decisions are taken by consensus in accordance with the provisions of the agreement. The agreement will often provide that certain important decisions cannot be made unless all shareholders (or a certain percentage) agree to them – so minority shareholders can veto them. These typically include decisions to issue further share capital, and making changes to the company’s articles of association. A shareholders’ agreement minimises any potential for disputes between shareholders by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.
Issue, transfer and transmission of shares
A shareholders’ agreement will often makes specific provision for the procedure on issue, transfer and transmission of shares. The agreement will often include ‘rights of pre-emption’ on issue, transfer or transmission of shares. Pre-emption requires the company to offer the shares to existing shareholders, pro rata to their holdings (or in any other proportions), before they can be issued or transferred to anyone else. Pre-emption rights therefore protect existing shareholders’ investment in the company from being diluted
Conclusion
There is no legal requirement to have a formal shareholders’ agreement, but every company with more than one shareholder is advised to have one. Such agreements minimise any potential for disputes between shareholders by making it clear how certain decisions will be made and by providing a framework and procedures for dispute resolution.
The form and structure of the shareholders’ agreement will vary from company to company based in large part on the ownership structure of the company. In many companies minority shareholders’ interests require protection, but each company is different. It is important that bespoke advice is taken at the outset of putting in place a shareholders’ agreement as this can prevent difficulties arising later which could have a disruptive effect on the success of the company and the relationship between shareholders.
For further information on shareholders’ agreements or to arrange an appointment for an initial consultation please call us on 020 7481 2422 for our London City office located at 65 Leadenhall Street, London EC3A 2AD or 020 8464 4242 for our Bromley office.