A Guide to Our Shareholders Agreement
by Kate Mccormick - Solicitor
Our guide to our shareholders agreement will provide you with full instuctions on how to complete our downloadable template and tell you anything else you may need to do this.
A Guide to Our Shareholders Agreement
This Shareholders Agreement is for use by a company limited by shares to set out the rules that will govern the relationship between the shareholders of the company.
Clauses in this Shareholders Agreement
Cover page - you will need to insert the names of party 1 (shareholder A) and party 2 (shareholder B) and add boxes for any additional shareholders.
Between – you need to insert the name and address of the shareholders here. If either shareholder is a company this should be their company name and registered number and registered office address.
Background - this clause gives background information to set the scene for the Shareholders Agreement.
1. Interpretation – you will need to insert the name and company number of the Company.
2. Business Of The Company – you should insert details of the business to be conducted by the Company if this is something that you need to regulate.
3. Directors – you need to decide on the minimum number of directors and whether you wish to provide for directors meetings to be regularly held and if so how often.
4. Accounting And Other Matters – you need to decide whether you want to provide for regular management accounts to be prepared and if so how often.
5. Company Dividend Policy – how much will be distributed by the Company by way of dividends each year? This will depend on the nature of the business. You do not need to include this clause if the business is intended to be a growth company and retain its profits.
6. Status Of This Agreement And The Parties’ Obligations – this clause requires the shareholders to exercise their voting rights to ensure that the terms of the Shareholders Agreement are complied with and states that where there is a conflict between the terms of the Shareholders Agreement and the Articles, effect should be given to the terms of the Shareholders Agreement.
7. Minority Protection – this clause provides a none-exhaustive list of circumstances and decisions requiring the unanimous consent of all the shareholders. This protects the minority shareholders who would otherwise have little or no say in the matters. You can add to the list of matters or delete those that are not appropriate to your business.
8. Promotion Of The Company’s Business – this clause requires the shareholders to act in the best interests of the company. This is particularly important where the shareholders are also directors and reflects the duty of directors to promote the success of the company contained in the Companies Act 2006.
9. Confidentiality – this clause imposes confidentiality obligations on the shareholders so that they do not disclose any of the company’s confidential information to third parties, including the terms of the Shareholders Agreement.
10. Shareholder Deadlock - a deadlock situation will occur in a two-member company where one member votes against a resolution or abstains from voting or a quorum is not present at a meeting, preventing any business from being conducted. There are two options for resolving the deadlock, either mediation or adjudication. If these methods do not provide a solution, the agreement then provides for the sale of the business. You can choose this mechanism, or alternatively, insert instead a different mechanism of your choosing for resolving a deadlock, such as a compulsory transfer of one party’s shares. You should delete any clauses that you do not require, including either clause 10.4 or 10.5.
11. Procedure on Winding Up – this clause helps to ensure that the company is liquidated in an appropriate manner. You do not need to amend this clause.
12. Transfer Of Shares – this clause sets out various events and requirements for the transfer of shares by one or more of the members. The first provision ensures that any transfer is first offered to the existing shareholders. If they fail to take up the offer then the shares can then be sold to a third party. You may wish to include further restrictions so that they are then offered to family members or to prohibit transfers to certain third parties or competitors. The next provision is to prevent a deceased member’s estate or representatives from being involved in the management of the company by being obliged to offer their shares to the existing member(s). The third provisions is an obligatory transfer provision and can provide a further mechanism for avoiding deadlock where one shareholder is preventing the business from moving forward. Clause 12.5 sets out how the shares to be transferred will be valued. You should choose which of these provisions you require and remove the square brackets and then delete any that you do not require.
13. Entire Agreement – this clause prevents either party from being held liable for statements or agreements that are not contained in the shareholders’ agreement itself. It is a standard clause that does not need to be amended.
14. Assignments – this clause prevents either party from assigning their rights under the Agreement to a third party without the consent of the other(s). Again, this is a standard provision.
15. Waiver Of Rights, Compromises – this clause protects the legal rights of the parties by ensuring that they are not compromised by delay or failure to take action to enforce them. This is a standard clause.
16. No Partnership – this clause helps to prove that the parties did not intend a partnership to arise between them, which can otherwise be the case where two parties carry on a business in common with a view to profit.
17. Costs – this clause provides that each party shall bear their own costs in relation to their rights under the Agreement.
18. Good Faith – Unlike directors, shareholders do not have legal duties to act in good faith towards each other. This clause obliges them to do so, in the best interests of the Agreement. The purpose of this clause is mainly a reminder to the parties to encourage them to uphold the terms of the Agreement.
19. Third Party Rights – this clause excludes the Contracts (Rights of Third Parties) Act 1999 from applying to the Agreement so that only the parties to the Agreement can enforce it.
20. Notices – this clause explains how notices should be sent to or from the shareholders.
21. Governing Law And Jurisdiction - If the Company is based abroad, you may wish to change the jurisdiction clause to reflect this and/or make it non exclusive. Where the Company is based in the UK, it is easier if the jurisdiction is exclusively that of England and Wales.
Signature Clause – this clause binds each shareholder to the terms of the Agreement.
You should insert the name of each shareholder here and then each shareholder or their representative should sign the Agreement above their name. Once signed by all the shareholders, copies should be taken and given to each of them and a signed copy should be kept together with the company books.
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