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  • Shareholders' Agreements - The Devil’s in the Detail
News 1
8
Apr
Shareholders' Agreements - The Devil’s in the Detail
News

Chris Brightling, Head of Corporate & Commercial at Girlings Solicitors explains how a simple agreement between shareholders can minimise substantial risk and also how well drafted company articles can increase your business’s efficiency.

As businesses prepare for the challenges and opportunities that may arise in the New Year, consideration should also be given to the corporate governance structure of the company. Businesses can outgrow previous structures and a review of the company’s fundamental organisational documents—primarily the articles of association and any shareholders’ agreements that may exist—is useful to ensure the company retains the functionality and flexibility necessary to compete in their current market.

A company’s articles are effectively a contract of membership between the company and the shareholders and they include procedures for general meetings, transferring shares and the decision-making power of the directors. All companies registered in England and Wales must have articles of association, which are publically available at Companies House. As adopting articles is a requirement for incorporation, for ease many companies adopt the statutory default Model Articles or use an incorporation agent who will use template articles. However, this means the articles often don’t reflect the reality of how the business operates which can lead to inefficiency. For example, the Model Articles require two directors as quorum for a board meeting, which can create significant problems if one director is incapacitated or absent for an extended period. Another common problem with the Model Articles is that they specifically prevent a director who has a personal interest in a matter being counted to form quorum. This again is highly inefficient, particularly in small companies where directors almost always have vested personal interests in the business of the companies. Potential problems like these can be avoided by drafting tailored articles for the company, which better reflect the circumstances of the business.

Shareholders’ agreements also regulate the affairs of a company but differ in that they are private documents and are effectively a contract between and amongst the shareholders. Shareholders’ agreements are generally relevant for any company that has more than one shareholder. Even if the company is a family business or the partners are close friends, there is always a risk of people falling out and a shareholders’ agreement is an exceedingly useful document if there is ever a dispute. Because shareholders’ agreements remain private, these are useful instruments to include more commercially sensitive company procedures including provisions around the issuing of share capital, the company’s dividend policy and dispute resolution. Shareholders also exercise influence over the directors of the company using consent clauses in a shareholders’ agreement that require the directors of a company to secure shareholder consent before conducting specific actions, like issuing new shares, taking out loans or making any change to the company’s articles. Shareholders’ agreements also often include provisions for compulsory share transfers following the departure or incapacitation of a shareholder, which provide protection for the company and remaining shareholders. Protections called drag-along and tag-along rights can also be added in to a shareholders’ agreement to protect both majority and minority shareholders when the majority shareholder is looking to sell and exit the company.

Given the fundamental nature of a company’s articles and the shareholders’ agreements, prudent business owners should conduct a periodic review to ensure those documents are meeting their needs.

For further advice on well-drafted company documents, ask the expert and contact Chris here

Please read Reliance on information posted in our Terms of Website Use - see Legal section - before relying on this commentary.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

Authors

Chris Brightling

Head of Department
Corporate, Banking & Finance and Commercial Law
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Our Experts

Chris Brightling

Head of Department
Corporate, Banking & Finance and Commercial Law

Caroline Armitage

Consultant Solicitor
Corporate, Banking & Finance, Commercial Law and Charities & Not for Profit

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Senior Associate Solicitor
Corporate, Banking & Finance and Commercial Law

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