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Home > News > Shareholders Agreement for owner managed and family businesses

Shareholders Agreement for owner managed and family businesses

12 June 2020 | Paul Hardman

Should you have a Shareholders Agreement?

A Shareholders Agreement is valuable not just for the legal document but for the process you need to go through to produce the agreement.  It will cover the management of the company and voting levels for key decisions, the dividend policy of the company and the relationship between the shareholders in particular what will happen if one of the shareholders decides he or she wants to sell, when the shareholder is compelled by the agreement to sell and what happens if some only of the shareholders want to sell to a third party buyer.

Selling your shares (and being compelled to sell them)

Typically, shareholders will have rights of pre-emption with the shares of an outgoing shareholder being offered around to the continuing shareholders and the continuing shareholders (or the company itself) having the right (but not the obligation) to buy out the outgoing shareholding. Then the question arises at what value and here the shareholders agreement is very useful at defining how the shareholders regard the investment in the company whether it is to be on the basis of a proportionate value of the whole company or on the basis of the value of the shares as a separate tradeable asset.  If it is a separate asset, the value of the shares will be at a discount if those shares represent a minority shareholding and a premium if they represent a majority of the shares.  For a relatively small share, say 10%, the discount can be in the region of 80-90% so getting this right will be hugely significant.

Another significant issue to address is whether the shareholding is linked to a continuing role in running the company or more generally in the success of the company.  If there is that link, when that shareholder leaves the company he will be required to sell the shares to the other shareholders.

This is a hugely important principle to understand and discuss and will involve balancing the needs of the company’s management to keep a tight control of the company and to be rewarded for their energy drive and entrepreneurial flair against the value that the shareholders want to retain for a future sale.  

The shareholders agreement may also address the rights of some of the shareholders, for instance an agreed majority to require the other shareholders to join in the sale to a third party buyer.  This again is hugely significant question and not just for the shareholders but for the would be buyer.  

New share issue

A Subscription and Shareholders agreement contains the usual clauses that you would find in a Shareholders Agreement but with one major addition and that is to do with the subscription promises that investors in the company have made. These will require the investors to subscribe in the capital of the company at an agreed price and on given dates for the class of shares that has been agreed for them. This is the basic capital funding package for the company typically at the start of the company or at key moments in its development were funding will take the company through to the next stage.

A Shareholders Agreement will address the rights to issue more shares and therefore the rights of the shareholders to prevent their per centage being diluted or at least having the opportunity to subscribed for more shares at the same price as they are being offered to others.

Other issues

A Shareholders Agreement can cover any number of issues as agreed by the shareholders including the following:

Management Responsibilities

One area could be the management of the company, including the roles and responsibilities the shareholders will have as directors and employees of the company.  The shareholders agreement may be accompanied by employment contracts which will further define those roles and responsibilities and these will become particularly important in the context of the Shareholders Agreement if the shareholder is required to sell his or her shares when he or she leaves.


The Agreement may determine the rules and frequency of board meetings and the requirements for notice and quorums as well as the management accounting, business plans and other financial information that is to be made available to shareholders.

Voting Controls

Another area is voting levels. By company law a company is controlled by a majority of its ordinary shareholders therefore meaning just over 50% . Some resolutions require a vote of 75% such as changing the Articles of Association, , disapplying pre-emption rights on issue and liquidating the company but the Shareholders Agreement can determine the key decisions are to be taken by any specified majority that the shareholders agree. These key decisions could be the purchase of another company or business, a change in the share capital of the company, dealings between the company and any of the shareholders including changes to employment contracts, the hiring and firing of staff and any number of other provisions that the shareholders agree should be included.

Dividend Policy

This can be significant for investor shareholders who want to make sure that the usual rule, that the recommendation of dividends is in the discretion of the directors, is varied so that there is a greater obligation upon the directors to vote dividends if certain conditions are met .

Shareholder Loans

Where the shareholders are lending money to the company or giving personal guarantees, the shareholder agreement will address the rights attaching to those loans including for instance interest rates repayment dates and any other rights which could include a right to convert into shares and that any loans are to be repaid and personal guarantees released if the shareholder leaves the company.  

Shareholder Restrictions

The Agreement can contain restrictions on the shareholders from competing with the business of the company while they hold shares and for a period afterwards and similarly from seeking or acceptance the business of its customers and poaching its employees and consultants.

What if you already have a Shareholders Agreement?

If you have an existing shareholders agreement now is a good time to have a look at it and make sure that it is still right for you and covers all these points.  If you have cross-option arrangements linked to insurance policies now is a good time to review them.  These will pay-out in the event of insured event occurring such as incapacity or death.  The idea is that the cross option will allow those shares to be bought out and the insurance policy will provide the means to do that.  This will involve a valuation of the company in today’s market and that may produce a reassessment of the premium and an amendment of the buyout price.

What about the Articles of Association?

The Shareholders Agreement will take precedence over the Articles of Association but you may still need to adopt specific Articles, for instance if you want to create separate classes of shares.  You should also consider updating the Articles of Association if they use pre 2006 Companies Act Table A regulations. 

Specialist legal advice

If you are thinking about future planning for your business, talk to us. Call 0117 906 9400 or email 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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