In the absence of a shareholders' agreement your rights and obligations as a shareholder in a private company are set out in the Companies Acts 1985 & 2006 ("Companies Acts") and the company's Articles of Association ("Articles").

Commonly, the provisions of the Companies Acts and the Articles (unless they are Articles specifically prepared for the company) may not provide the level of rights that shareholders wish to have the benefit of, nor the level of obligations that they wish their fellow shareholders to be subject to.

For example:

Unless the Articles state otherwise, a director may only be removed by shareholders holding more than 50% of the voting rights in the company.  This situation is unsuitable for many private companies who have minority shareholders who require the right to be a director to ensure that their interests are taken into account in the running of the company.

What happens if a shareholder dies?  

Usually, the surviving shareholders will want the deceased shareholder's shares to be transferred to them or back to the company to prevent the shares being transferred to a third party who would then be involved in the company.

Often the Articles will cover this situation to some degree, but a shareholders' agreement can be used to govern the whole process including how the price for the shares will be calculated, paid and funded.

These are just two examples of many problematic situations that can arise and that a properly drafted shareholders' agreement can help to avoid.

Articles & Shareholders' Agreements

An important issue that is often overlooked is the difference between the Articles and a shareholders' agreement.  On the face of it they may appear to be one and the same in that they both set out a shareholder’s rights and obligations. However, there is a subtle, but significant difference.  

Articles

The Articles are a contract between the company and each of its shareholders.  As such the Articles can only be enforced by or against the company and not by one shareholder against another.  This can cause problems, particularly for minority shareholders who do not have sufficient voting power to procure the company to enforce the Articles against a shareholder who has breached the Articles.  

Shareholders' agreements

A shareholders' agreement has the advantage of being a contract between the shareholders themselves and therefore can be enforced by one shareholder against another.

Another advantage of a shareholders’ agreement is that it is a private document and unlike a company’s articles of association does not need to be filed at Companies House where they are open to public inspection.

It is often the case that a shareholders' agreement is not considered until a problem arises.  Unfortunately, it is usually too late then for the terms of a shareholders' agreement to be agreed by the shareholders.  The best time to put a shareholders' agreement in place is at the time of setting up the company when relations between shareholders are amicable.

How we can help

If you require a shareholders' agreement our corporate solicitors can offer you advice and support to help you get an agreement that is right for you.

Our corporate solicitors are experienced in drafting shareholders' agreements for companies of all sizes and will always make sure that we understand the commercial objectives of the company and the shareholders. 

Contact us now

For further information or to arrange an appointment contact a member of the corporate team on 0115 9 100 200 or email corporate@actons.co.uk or fill in the contact form below.