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The Memorandum and Articles of Association of a company are a statutory contract between the members and between the company and its members.
A shareholders agreement, if any, is an additional contractual arrangement between the shareholders who are parties to the agreement. It may not be binding on the company. For example, if a company increased its share capital despite an agreement between the shareholders not to do so without unanimous written consent, the shareholders would have a claim between themselves, but not against the company.
Shareholders agreements take a variety of forms, and serve a variety of purposes. They are usually in writing and signed by shareholders who together own at least a majority of the company's voting shares.
A new business venture between relatives, friends or colleagues may start with an informal, enthusiastic spirit of agreement, and a formal shareholders agreement may seem unnecessary. This can turn out to be a big mistake if a dispute arises. Without a shareholders agreement the methods of resolving differences through the courts are cumbersome, expensive and time consuming, and it is also very difficult to predict the outcome.
A solicitor experienced in drafting shareholder agreements will be able to advise on the appropriate clauses for an individual company. A formal shareholders agreement, drawn up before trading commences, as soon as practical thereafter, or indeed at any time, can prevent serious disagreement and major financial loss.
One advantage of having a shareholder agreement drafted by a solicitor should be a clear and unambiguous document to which all the participating shareholders can refer.
We strongly advise that shareholder agreements are drawn up by solicitors who are familiar with this area of the law.
A typical shareholder agreement will set out which decisions require what consents. Where a minority shareholder might not have significant voting rights, a shareholder agreement can allow the minority shareholders a right to be consulted and their consent before borrowing large sums of money, recruiting or dismissing key staff, or modifying the nature of the trade.
If the company shareholdings could lead to vote being a stalemate, for example when there are four 25% shareholders, the agreement should state what happens if the shareholders cannot decide how to proceed.
Disputes sometimes arise over the sale of shares in a company. A shareholders agreement can help by providing a framework available to all the shareholders stating how their shareholdings will be valued, especially any minority shareholdings. This can enable shareholders to know that they have an exit strategy, or that on their death there is a mechanism for the sale of their shares by their executors. There may also be a potential tax problem here where shareholders are connected because the Inland Revenue will substitute market value for the value at which a transaction has taken place.
A shareholders agreement can also provide a framework to remove a shareholder who is in disagreement with the majority on a matter which affects the future of the company.
Some of these matters may be included in the Articles of Association which are registered with Companies House and are available to the public. A shareholders agreement is a private arrangement only known to the parties to it.
Shareholders who are sufficiently forward thinking to prepare an agreement may never need to use it, whereas shareholders who do not plan for these contigences are more likely to wish they had put an agreement in place.
A shareholders agreement can also include many of the items found in a partnership agreement.
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