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  • Writer's pictureHiten Patel

The importance of shareholder agreements

Updated: Mar 21

A clear and fair shareholder agreement can help prevent unnecessary disputes from arising.


Hiten Patel, Senior associate, KaurMaxwell Croner-i


Until recently, vehicle manufacturers Renault and Nissan were locked in a complex commercial dispute, seeking to tear up their existing shareholder agreements in order to improve the alliance between the two companies.


After prolonged negotiations, the two companies have now agreed upon a plan to equalise the shareholdings they held in each other. Yet whether companies are corporate giants or small businesses, shareholder agreements invariably play a key role in how companies operate.


Shareholder agreements help determine what happens to shares in a wide range of eventualities, ranging from the sale of the business to the death of a shareholder. They can prevent companies from taking certain steps without shareholder approval. Such agreements provide necessary protections to shareholders who want to sell their shares, and can deal with the specific issues that may arise where a shareholding is tied into a shareholder’s employment with the company.


Shareholder agreements can offer a variety of protections while also facilitating sufficient latitude of action for the board of directors, so that the company can trade freely and expand flexibly. A delicate balance must be struck, since while shareholders do not want to be involved in the day to day management of a company, they do want to retain a sufficient degree of control over the company they own.


At its simplest, a shareholder agreement governs the rights, obligations, and responsibilities of the shareholders in a company. The content of the agreement can and should vary, depending on the needs and goals of the shareholders, and the nature of the company itself.


Each company is different and, as a result, shareholder agreements should be carefully calibrated to reflect the scale of a company as well as the business sector and jurisdictions in which it operates. There is no such thing as a one-size-fits-all shareholder agreement and it is essential that shareholder agreements are bespoke to the company and shareholders concerned.


A well-written shareholder agreement should clearly set out what the dividend policy is and what input each of the shareholders will have in terms of their roles. This should encompass voting rights and decision-making authority, which are ultimately the areas where disputes typically arise. A clear and fair agreement can help prevent unnecessary disputes from arising.


However, in my experience, the single most important protections that a shareholder agreement should provide are clear and transparent clauses which set out exactly what happens if there is a dispute between the shareholders.


Agreements should be drafted not only to reflect the nature of the current shareholders, as shares can of course be sold, but should be drafted in anticipation of a wide range of potential future shareholders.


A properly prepared agreement which prevents disputes arising should be considered as an investment by all concerned, because it may greatly help avoid costly litigation further down the line. It can also include clauses requiring that mediation, arbitration or dispute resolution are entered into, in the event of a dispute arising.


It is also essential that shareholders are consulted as to the terms of a proposed agreement and are actively involved in its preparation. Once all shareholders are happy with the terms, and the document is executed, it becomes a binding agreement which will supersede any previous discussions or agreements.


It therefore becomes the first port of call in the event of a disagreement or a deadlock between shareholders when making decisions for the company.


Of course, the nature of shareholder agreements will differ, depending on whether it concerns a private limited company with many shareholders, or a management buyout or a joint venture between two parties.


Certain key factors should always be considered when drafting shareholder agreements. These include:


Ownership structure


The agreement should reflect the ownership structure of the company, including the number and type of shares held by each shareholder.


Shareholder rights and obligations


The agreement should also outline the rights and obligations of each shareholder as regards voting rights and dividends. Where there are obligations to contribute additional capital to the company, these should be clearly set out. It should also address the transfer of shares, the process involved, and any restrictions, pre-emption rights, or rights of first refusal.


Management structure


Bespoke agreements should reflect the specific management structure of the company, and the process for appointing and removing directors and officers, as well as the duties of the board of directors.


Dispute resolution


The agreement should include provisions for resolving disputes among shareholders, such as mediation or arbitration clauses.


Confidentiality


It may be that a confidentiality clause is required to protect sensitive business information.


Non-compete clauses


It may also be deemed necessary to include non-compete clauses that restrict shareholders from competing against the company, or from entering into commercial arrangements with the company’s customers.


The agreement will of course need to be drafted to conform with UK company law but should also mirror the company’s Articles of Association which may also need to be amended in certain circumstances.


At the outset of a new business venture, the parties involved are invariably positive and collaborative. That can change all too swiftly. The agreement should pre-empt conflict by providing clarity and reduce the impact of conflict by providing efficient dispute resolution mechanisms. It is also vital to set out how stalemates in voting will be resolved.


Yet, at the end of the day, sometimes shareholders will want to exit the arrangement for any number of reasons. This can be the simplest way to end an arrangement which is no longer working for one or more parties, therefore it is important to make sure that there is a simple process available to enable shareholders to simply sell up and move on.


When drafting a shareholders agreement, it is essential to take a collaborative, friendly and co-operative approach, which respects the views and concerns of all involved. A well drafted and bespoke agreement can help create and maintain a collaborative ethos among shareholders for many years to come.

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