Whilst the Companies Act 2006 legislates the need for every limited company in England and Wales to have articles of association, a Shareholders Agreement differs in various ways.
Articles of Association are defined as a set of rules that outline how a company will be governed. They are also a matter of public record which is lodged at Companies House, and visible to anyone.
A Shareholders Agreement, by contrast, is a wholly private contract that establishes the rights and responsibilities of the shareholders of a company.
Shareholders Agreements are not compulsory, and as such, there is not a set format or prescribed provisions. They can, within reason, detail anything both parties wish them to.
4 things to consider when drafting a Shareholders Agreement
Setting out a clearly defined agenda when drafting a shareholders agreement should be first priority. The points below offer general guidance on the key things to consider or include.
Be clear on the scope of issues the agreement should cover
When faced with the task of agreeing on the issues the agreement will cover, it is worth considering these common issues:
- Directors and Member relations: there will always be the chance of conflict arising between members and directors. Areas like salaries and bonuses are typically areas of contention and disagreement.
- Changes in business direction: changes in business direction usually fall into either the products or services offered or how/where the business operates
- Share control: Shareholders might change hands for several reasons but the important thing to do is to understand how much control each shareholder has over the other when it comes to the rights and powers associated with the percentage of shares held.
Outlines decision-making processes
Even though the day-to-day running of a company is not within the remit of shareholders, they will want a say on decisions that affect things like the value of the company.
With this in mind, it is important for a shareholder agreement to explicitly outline who makes these decisions. This should also include aspects of the process like disclosure of any decision-making.
Establish what each shareholder is entitled to
It is worth defining here that certain rights and entitlements come with being a shareholder, such as notifications of Annual General Meetings and Extraordinary General Meetings.
Current company law outlines the fact that shareholders who hold over half of the equity have greater entitlements, like the power to remove or appoint new directors.
Define how the voting power of shareholders adds up
There are various ways in which a shareholder agreement can outline how voting power becomes associated with the number of shares.
Some shareholders may prefer an agreement in which everyone has an equal say in the decision-making process. Others may be in favour of giving a greater proportion of voting powers to those who have contributed more financially.
Both of these approaches have their merits and demerits.
A rule of thumb is to keep the voting power equation as simple as possible.
If you need advice on how to draft a shareholders agreement or are looking to outsource the creation of one, contact us today.