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Corporate Advice & Shareholders Agreements

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Shareholders Agreements

A Shareholders Agreement is a legally enforceable agreement between shareholders and their company which can help avoid expensive and potentially damaging disputes. Shareholders Agreements are prudent to have in force because they can deal with matters like the organisational structure of the company, decision-making and arrangements for compelling the sale or purchase of shares between the shareholders. At Eric Robinson Solicitors our expert team can help in negotiating these agreements and will ensure that the final document reflects your strategic requirements.

What is a Shareholders Agreement?

A shareholders’ agreement is an agreement entered between all or some of the shareholders in a company that regulates their rights and obligations and puts in place a framework over factors including how the company should be managed, who has decision making powers, how shares can be created and transferred, what happens if a shareholder wants to leave, or what happens in the event of a dispute. A company’s standard constitution and the Companies Act 2006 provide some protection for shareholders, but it can be limiting and relying on this alone is not recommended.

Our skilled corporate law team has extensive experience in advising directors and shareholders on all aspects of shareholder agreements and the legal relationships within a company.

Are Shareholders Agreements Legally Binding?

A shareholders agreement should be legally binding once it has been signed, provided it complies with the typical aspects of a contract, including offer, acceptance, consideration, and an intention to create legal relations. It is important you seek specialist legal advice regarding drafting and signing a shareholder’s agreement to ensure your rights are protected. Our experienced commercial lawyers can advise you on all the areas your shareholders agreement should cover.

What should a shareholder agreement include?

A Shareholders agreement will have some personal elements depending on the type of business, the shareholders’ relationship, and the company’s structure. However, there are some standard items typically included, such as:

  • The types of shares and who owns what
  • Shareholders’ rights and obligations
  • How votes are decided
  • How shares are created
  • How shares can be sold or transferred to another person or company
  • Details of who financed the company and how repayment will be made
  • Dividend policies
  • Non-solicitation or competition clauses
  • How a shareholder can leave
  • How a dispute should be handled

What’s the difference between a shareholder’s agreement and an article of association?

A shareholders document can be private, and there is no requirement to file it at Companies House. Therefore, its content can be kept confidential and provides safeguards for the shareholders that the Standard Article of Association does not cover.

The ‘Article of Association’ defines the responsibilities of the directors, the business operation, and how shareholders can control the company directors. Articles of association are mandatory for a limited company, and you can create your own or adopt generic ones when incorporating your company. Whilst a shareholder agreement is not a legal requirement, it contains more aspects designed to protect and resolve conflicts arising from disputes between shareholders.

Creating your own shareholders agreement or any form of contract without legal help is not recommended. It is essential you seek legal advice from a specialist lawyer who can draft a bespoke document based on your company’s requirements that will protect the rights of you and your business.

Why should I have a Shareholders’ Agreement?

Fundamentally, a shareholders agreement protects the legal rights of those involved, minimising conflict and disputes in a range of typical situations. Without a shareholder’s agreement, it won’t be easy to ascertain the rights of those involved, and you will have to rely on the company’s articles of association or the Companies Act 2006. Shareholders may find themselves at the mercy of general company law, with a general legal position that does not deal with matters as they would have intended. If you require advice on drafting, reviewing, or negotiating your shareholders’ agreement, our specialist business law lawyers can help.

Can you Terminate a Shareholder?

If you want to remove a shareholder, it will largely depend on the documents you have in place. Even for majority shareholders, there is no automatic right to force another shareholder to sell their shares. Well-drafted articles of association or a shareholders’ agreement can prove extremely valuable in these situations. The articles of association may have provisions which would enable the majority shareholders to force the minority shareholder to sell. Or, the shareholders’ agreement may include specific clauses concerning the exit of a shareholder, putting in place remedies for the company to buy-back the minority shareholder’s shares, and/or a clause outlining the terms under which a shareholder can be removed.

There are other more aggressive methods, including something called members voluntary liquidation (MVL), the process of winding up the old company and transferring shares into that of a new one. However, you should not do this without careful consideration or guidance from a specialist legal adviser. These are just a few examples, and seeking early legal advice is crucial. Our experienced legal team can determine the various options available to you depending on the situation and will ensure the process is followed correctly. A disgruntled shareholder could apply to the court claiming ‘unfair prejudice’ if they feel the process has been unjust, and disputes could end in costly and lengthy litigation. Regardless of the complexity of your situation, we will work with you to find a solution that resolves the matter effectively, encouraging the other party to negotiate sensibly.

How do you resolve a shareholders’ dispute?

Depending on the structure of your business, the division of shares and what agreements and articles are in place will typically dictate the best way to resolve the dispute. Your first step should be to seek early legal advice, which can help minimise the impact of the dispute and ensure you are aware of your rights and options. Where possible, it is advisable to try and resolve the dispute by negotiation or some agreed form of alternative dispute resolution (ADR). Our specialist dispute resolution lawyers can guide you through the process, working with you to find the right solution for you and your business. Should ADR prove unsuitable or unsuccessful, we have the expertise to represent you in the courts. Other options include:

  • Unfair Prejudice Petition
  • Derivative Claim
  • Just and Equitable Winding Up Proceedings

Our skilled team has extensive experience in bringing and defending Shareholders’ actions and in negotiating sensible resolutions.

How do you enforce a shareholders’ agreement?

Much like any other contract, a shareholders’ agreement is legally binding. Therefore, in most cases, the standard rules of contract law will apply regarding enforceability and the remedies available if a breach of that agreement or a dispute occurs. If you are concerned about the actions of a director or another shareholder or worried your rights are being infringed, there are several actions you can take. The nature of the dispute or the impact of the breach will be unique to each case, but typically consequences could include:

  • Termination of the shareholders’ agreement or termination of employment.
  • The innocent party could seek damages for loss suffered because of the breach.
  • The court may order specific performance of the contract or of the provision breached.
  • The innocent party may seek an injunction to prevent a threatened breach.
  • Court ordered injunction requiring the offending shareholder to take an action such as transferring their shares

Ultimately a shareholders’ agreement is a legally enforceable contract, so where there is a failure of the obligations within a shareholders’ agreement, the wronged party can claim for breach of contract, enforcing the terms of the agreement.

Seeking specialist advice when assessing how to enforce a shareholder agreement is advisable due to the complexities in this area of law. Our skilled team has extensive experience advising directors and shareholders on all aspects of shareholder agreements and the legal relationships within a company.

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