Shareholders' agreements for owner-managed companies

A shareholders’ agreement is a private contract between the owners of a limited company. It sets out how the company will be run, what each shareholder can and can’t do, and what happens to someone’s shares when they leave, die or want to sell. If your company has more than one shareholder, it’s probably one of the most important legal documents the company can have.

I hear the same thing all the time: “we’re friends, we’ve worked together for years, we won’t fall out.” Sometimes it’s family. Most of the time people are right and the agreement is never needed, but where two 50/50 owners stop speaking and there’s nothing in writing, sorting it out is slow and expensive and the business suffers while it goes on. The agreement costs far less than that, and it’s much easier to negotiate while everyone is still getting on.

When you need one

The obvious time to put one in place is when the company is set up, but in practice most people do it later, when something changes. That might be an investor coming in, a key employee being given shares, a spouse being issued alphabet shares, a founder wanting to step back, or a sale being planned where somebody has realised that a buyer will ask for it. It’s also worth revisiting an old agreement if it was signed by people who’ve since left, or was written when the company was a tenth of the size.

What goes in it

The most important part is what happens when a shareholder leaves. If someone who works in the business resigns or is dismissed, the agreement will usually require them to offer their shares back, and most of the negotiation is about the price. A “good leaver” (retirement, ill health, death) typically gets fair value and a “bad leaver” gets less, so how those two are defined needs careful thought.

Death and serious illness need to be dealt with separately. Without an agreement, a shareholder’s shares pass under their will, and the survivors can find themselves in business with a widow, widower or children who never expected to own part of a company. The usual answer is a cross-option arrangement backed by life insurance, so that the survivors have the right and the money to buy the shares and the family gets cash. I’ve written about what happens when a shareholder dies and about cross-option agreements.

The agreement also deals with control, by listing the decisions which need everyone’s consent, or a set majority, whatever the board would otherwise be able to do alone, such as issuing new shares, taking on debt, changing salaries or selling the business. For a 50/50 company it should also say what happens if the two of you can’t agree, as otherwise there is no way of breaking the deadlock.

Selling shares is the other main area, and existing shareholders normally get first refusal before shares go to an outsider. Drag-along rights let a majority who have found a buyer require the minority to sell on the same terms, and tag-along rights let the minority insist on being included. Buyers usually want 100% of a company, so it’s the drag rights which allow the company to be sold.

Lastly, most agreements include restrictions on shareholders competing with the company or poaching its staff and customers, both during their time as a shareholder and for a period afterwards, along with a dividend policy and rules about what information everyone is entitled to see.

How it fits with the articles

The company’s articles of association are a public document, which is filed at Companies House and binds whoever holds shares. The shareholders’ agreement is private and binds the people who sign it. The two have to say the same thing, so I nearly always amend or replace the articles at the same time, and that’s included in the fee. It’s part of my wider company law work.

Majority and minority shareholders

If you hold most of the shares, you want freedom to run the company, the power to get a departing shareholder’s shares back, and drag rights. If you hold 10% or 20%, you want a veto over the things which could dilute or sideline you, a right to information, a fair price if you’re forced out and a tag right if the majority sells.

I act for both, although only for one side on any given agreement. It’s common for a minority shareholder to be handed an agreement which was drafted by the majority’s solicitor and asked to sign it within a few days. If that’s you, I’d suggest having it reviewed first, as once it’s signed the leaver provisions and the valuation mechanism are very hard to reopen.

Fees and how long it takes

A standard shareholders’ agreement is a fixed fee of £2,500 plus VAT, which includes the matching changes to the articles. Where the company has alphabet shares or several share classes with different rights, it’s £3,000 to £5,000 plus VAT, depending on how many classes there are and how different they are. The fee and scope are agreed in writing before I start.

The process is simple enough, in that I ask you a set of questions, the shareholders agree the answers between themselves, I draft the agreement, you all read it and then it’s signed. These agreements can be complicated and aren’t the easiest documents to read, so I make sure you understand what it all says. My part doesn’t take long, and the timetable mostly depends on how quickly the shareholders can agree on the more difficult questions, which are better given a few weeks than rushed. Your accountant or financial adviser often needs to be involved on tax and insurance, and I’m happy to work alongside them.

If you’ve already fallen out

A shareholders’ agreement is there to prevent a dispute, and it’s too late to put one in place once you’re in one. I can give initial advice and negotiate an agreed exit for a shareholder. A full dispute is handled by Nexa colleagues who litigate these day to day (Alistair Haggerty in most cases), and there’s more on the shareholder disputes page.

Next steps

If you’d like a shareholders’ agreement, send me the details and let me know who the shareholders are, what each of them holds and does in the business, and what has prompted this now. I’ll confirm the fee and send you the questions to get started.