Getting Your Shareholder Agreement Right

It’s almost inevitable that a growing business will leave behind the days of just one owner and start to take on other shareholders. Whether it’s through equity investment from outside individuals or through offering shares to senior staff, business owners must grapple with the need to keep everyone happy as the business grows and evolves. 

While every business will need to register its Articles of Association with Companies House to create a public record of the company’s corporate governance rules, it’s then important that a second, crucial, document is negotiated and concluded. 

That is the Shareholders Agreement (SA). 

“A shareholder agreement addresses very nicely matters which you don’t want to make public,” explains Katherine Evans, director of legal firm Mirkwood Evans Vincent, who says that the SA is designed as a private document written by and for shareholders. 

Katherine explains that the SA serves as a roadmap and rule book governing how shareholders can work together, take on new investment, enact changes and ensure the company continues to function effectively as it grows, and shareholders change: 

That means it might have information about which class of shareholders can appoint directors, how long those people can be directors for and what classes of shares you need to think about. It might also address additional rights and/or obligations on the founders of the business, including covenants restricting what they would and would not be authorised to do after they ceased to be shareholders and/or rights and obligations affecting the future sale of their shares. It will also generally have wider provisions about share transfer mechanisms by all shareholders.

Given that many of these types of provisions may change from time to time, it’s unlikely that the company will want to continually publicly amend its articles. “You need 75% of the shareholder body to agree to a change of articles and every change appears on Companies House so people can see all the changes you make and they may look at those changes and wonder what absence of direction is prompting these changes of direction,” cautions Katherine . 

“Instead, the shareholder agreement is private, between only the people who sign it, it’s never made public.” There is no limit to what the SA can include, but Katherine suggests some -or many – of the following may find their way into the document: 

Enshrining the rights of smaller or minority shareholders: for instance, blocking the company from borrowing above a certain threshold and giving shareholders the right to appoint a director if they hold a certain percentage of the shares in the company. 

Protecting shareholders if major ownership changes are mooted: either through drag along (forcing shareholders to accept a deal at a certain price on the same terms as other shareholders) or tag along (giving shareholders the option to get in on a favourable deal). Both mechanisms can be used to help avoid gridlock and disputes in the future. 

Assuring new shareholders that their rights will be protected: new investors will expect certain protections in return for their money, and so the existing SA might spell out how those protections will be given practical effect. 

Of course, for the smallest businesses, drawing up an SA may not seem a pressing concern, but once the owner manager welcomes in outside investors, then getting this sorted out should be their next consideration. 

“Normally as soon as you’ve got two or three shareholders and/or you’re contemplating your first seed investment round, you should think about putting an SA in place,” advises Katherine. That original document will be signed by all current shareholders, while future shareholders would sign a one-page document called a “Deed of Adherence”, which binds them to the terms of the current shareholder agreement. 

Katherine speaks from experience, having worked for many years with companies of all kinds on developing a robust management and shareholder structure. That now encompasses working in concert with Paul Beare Ltd to provide exceptional legal services to both UK firms and those entering the UK from abroad. 

Young and growing businesses need time, patience and luck to succeed. They also need high quality advice and support from their professional partners. That’s why at Paul Beare Ltd we offer a full range of accounting services, from tax and payroll to accounting and banking and now corporate and commercial legal support.