When two or more people set up a company together, the focus is on getting the business off the ground. Few founders expect to fall out, and many never put an agreement in place between the owners. But circumstances change. A shareholder wants to leave, someone steps back from the business, or the owners disagree on its direction. A shareholder agreement sets out in advance how those situations will be handled. This guide explains what one is, what it should cover, and what can happen if you do not have one.
What is a shareholder agreement?
A shareholder agreement is a private contract between the shareholders of a company, and often the company itself. It sets out the rights and obligations of the owners and how certain decisions will be made. It sits alongside the company's articles of association, but the two are different documents:
- Articles of association. The company's constitution, which every company must have. They are filed at Companies House and anyone can view them. Many companies simply adopt the standard model articles without changes.
- Shareholder agreement. Not a legal requirement, but usually advisable where a company has more than one owner. It is private, so sensitive arrangements do not have to go on the public record, and it can be tailored to your business in ways the model articles are not.
If your business is a partnership rather than a limited company, a partnership agreement does a similar job.
What happens if you do not have one?
Without a shareholder agreement, your company is governed by its articles and the Companies Act 2006, which applies across the UK, including Northern Ireland. The default position may not reflect what the owners intended:
- The majority decides. Shareholders holding more than half the voting shares can pass ordinary resolutions, including a resolution to remove a director. A minority shareholder may have little say in how the company is run.
- 50/50 companies can deadlock. Where two owners hold equal shares and cannot agree, neither can outvote the other, and important decisions can stall.
- There is no agreed exit route. There may be no agreed way to value a departing owner's shares, or to require them to be sold back if someone leaves or falls ill.
- Shares can pass to people you did not choose. If a shareholder dies, their shares will normally pass under their will or estate, which may bring someone new into the business.
- Disputes can end up in court. A minority shareholder who feels unfairly treated may have to rely on court remedies, such as an unfair prejudice petition, which can be slow and costly for everyone involved.
What should a shareholder agreement cover?
Every agreement should be drafted around the business and the people involved. Common provisions include:
- Reserved matters. Key decisions that need the approval of all shareholders, or a set majority, such as taking on significant borrowing, issuing new shares or selling the business.
- Transfer of shares. Pre-emption rights, which give existing shareholders the first opportunity to buy shares before they can be offered to an outsider.
- Leaver provisions. What happens to a shareholder's shares if they leave the business, and how the price is set. Many agreements treat “good leavers” and “bad leavers” differently.
- Drag-along and tag-along rights. Drag-along rights let a majority require the minority to join a sale of the whole company. Tag-along rights let a minority sell on the same terms if the majority sells.
- Deadlock resolution. An agreed process for breaking a deadlock, such as mediation or a buy-out mechanism.
- Dividend policy. How and when profits will be paid out to shareholders.
- Restrictive covenants. Limits on a departing shareholder competing with the business, or approaching its clients or staff, for a set period.
- Dispute resolution. How disagreements will be dealt with before anyone turns to the courts.
When should you put one in place?
The best time is at the start, when relationships are good and everyone is aligned. It is much harder to agree terms once a disagreement has begun. It is also worth putting an agreement in place, or reviewing an existing one, when:
- You bring in a new shareholder or investor
- A shareholder takes on a bigger or smaller role in the business
- You are raising finance
- You are planning for succession or a future sale
- A family business is passing to the next generation
If a dispute has already started
If you are already in a disagreement with a fellow shareholder, check what the company's articles and any existing agreement say before you act. Taking steps without following the correct procedure, such as trying to remove a director without the proper notice, can make matters worse. Early legal advice can often help resolve a dispute before it damages the business.
A well-drafted shareholder agreement is one of the most useful documents a company with more than one owner can have. Our business and corporate team advises companies and their owners on shareholder and partnership agreements, company formation and business disputes across Northern Ireland. If your business operates from rented premises, our guide to commercial leases in Northern Ireland may also help.
This article is general information about the law in Northern Ireland and is not legal advice for your situation. For advice on a specific shareholder or company law matter, speak to one of our solicitors. Call your nearest office or send an enquiry and a member of our team will be in touch within one working day.
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