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Contracts underpin all business transactions and dealings. They help to build trust between individuals and businesses and are legally binding. This means that you can receive compensation if the other party refuses to uphold their obligations under the contract. Additionally, businesses can consist of multiple shareholders. This arrangement is governed by a shareholders’ agreement. This article will explain what a shareholders’ agreement is and what important clauses you should include in yours to protect your company’s business.

What is a Shareholders’ Agreement?

A shareholders’ agreement is a legally enforceable contract. It controls the relationship between shareholders, and the relationship between shareholders and the company. It also sets out the ownership stakes of each shareholder and whether this allows them to become a director on the board. Finally, the shareholders’ agreement will explain whether any special procedures must be followed when you sell shares in your company.

Key Clauses

Names of the Parties

You should include the names of the parties in your shareholders’ agreement as an initial clause. However, this might be impractical if you have a large company with many shareholders. If this is the case, you will likely only include the names of shareholders who have a certain number of shares or ownership percentage. 

Directors and Decision Making Process

The shareholders’ agreement should outline who the board of directors are. The board of directors make decisions relating to the organisation of the company. Further, the board of directors is usually made up of shareholders of the business. However, they can also be independent directors that you appoint externally. Finally, this clause should determine the term length for a director and the process by which you appoint directors to the board. 

Additionally, the shareholders’ agreement may outline the decision-making process of the board. It should determine: 

  • how you are structuring the voting system; and 

  • whether any particular motions require more than just a simple majority to pass. 

Voting Rights

Shareholders are entitled to voting rights even if they are not directors on the board. Usually, shareholders will have one vote for every share of the company they own. They can use these votes to: 

  • appoint or dismiss directors; 

  • approve an important transaction; or 

  • put the company into liquidation. 

However, not all shares have the same voting rights. For example, preference shares do not usually have voting rights as they benefit from their priority when dividends are paid. In comparison, owners of ordinary shares usually get regular voting rights. 

Dispute Resolution

Your shareholders’ agreement should also include a clause about dispute resolution in case shareholder disputes arise. A dispute resolution clause is essential as litigation will be inconvenient for any shareholder. One example of a good dispute resolution process is a shareholders’ meeting. If you cannot find a resolution with a shareholders’ meeting, then you can try mediation. Mediation is where a third-party mediator facilitates a discussion to solve the dispute. You should only use litigation as a last resort. 

Right of First Refusal

Another important clause that you may want to include in your shareholders’ agreement is a right of first refusal. A right of first refusal allows other shareholders the first right to buy any shares that a current shareholder wants to sell. This clause will help strengthen shareholders’ trust in and loyalty to your company. 

Non-Competition Clause

You should include a non-competition clause in your shareholders’ agreement to stop your shareholders from doing activities for a competing business. However, a non-competition clause has to be reasonable to be enforceable. Therefore, it should only apply to shareholders that have a significant stake in the company, and not to minority shareholders.

Key Takeaways

A shareholders’ agreement is one of the most important contracts used for companies. This contract outlines how a shareholder interacts with other shareholders and the relationship with the company. It should contain key clauses to protect all the parties to the agreement. If it does not include certain clauses, disputes may arise and legal proceedings could follow. For legal assistance with managing your contracts, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I need a shareholders’ agreement?

No, it is not a legal requirement. However, it is a good idea to have one so that the shareholders know their duties and obligations.

What happens if there is a right of first refusal, but other shareholders do not want to buy shares for sale?

In this case, the shares are able to go to the market so the general public can have the opportunity to buy them.

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