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Advantages and Disadvantages of a Shareholders’ Agreement

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A shareholders’ agreement is a contract between the shareholders of a company, which governs their relationship with each of the shareholders and the company. It is an additional form of protection which supports the articles of association of the company, as it allows the shareholders greater say over how the company is run and to what extent they are involved. Effectively, it allows the shareholders to determine how much power is given to the directors in the running of the company.

Here, Greenaway Scott take a look at the advantages and disadvantages of having a shareholders’ agreement in place. If you would like advice on any of the matters raised in this article, please contact a member of the team at [email protected] or call us on 029 2009 5500 who would be more than happy to assist you. Alternatively, please submit a query through our website.

General Advantages

The following advantages benefit all parties involved with the shareholders’ agreement:

  1. Privacy: Unlike the articles of association and special resolutions, a shareholders’ agreement does not need to be filed at Companies House. This allows the company to retain an element of privacy on the internal workings of the company and the relationship between the shareholders.
  2. Dividends policy: It is of great importance to lay out in a shareholders’ agreement how shareholders are to receive the profits of the business, more so in companies whereby shareholders hold varying degrees of shares, which includes the percentage of net profit that must be distributed annually. This prevents any disputes arising and allows clarity with the payment of dividends.
  3. Non-compete clauses: A shareholders’ agreement allows the shareholders to formally exclude any shareholders from creating companies which directly compete with the company while they are a shareholder. Such a non-compete provision will often continue in force for a certain time after the individual ceases to be a shareholder of the company.
  4. Preference of lenders: Lenders to a company will often prefer for a shareholder’s agreement to be in place as it allows greater transparency on how the company is run and often contains exit clauses for lenders.

Advantages to Majority Shareholders

Majority shareholders have more of a need for a shareholders’ agreement as they own a higher percentage of the company, which means they have a bigger interest to protect. The following are advantages for majority shareholders:

  1. Drag along rights: These are clauses which can be drafted into a shareholders’ agreement which ensure that if the majority shareholders wish to sell their shares, the minority shareholders cannot refuse and must sell also. This is to prevent deadlock on a disposal as most purchasers wish to obtain 100% of the share capital in a company.
  2. Good and bad leavers: These clauses are significant as they allow the shareholders to dictate at what price they purchase the shares from a departing shareholder, dependant on their reason for departing. The shareholders can outline what constitutes a good leaver, such as retirement, and what is a bad leaver, such as wrongful behaviour.
  3. General protection of the majority: A shareholder agreement is a contractual document which allows the majority shareholders to protect any further bespoke aspects which are not covered in the articles.

Advantages to Minority Shareholders

Equally, the minority shareholders are afforded extra protection through a shareholders’ agreement in the following ways:

  1. Tag along rights: As with drag along rights, tag along rights can be imputed into a shareholders’ agreement so that when the majority shareholders are selling their shares, any shares held by a minority shareholder must be bought also. This prevents minority shareholders becoming trapped in a company which is controlled by shareholders that they had no control over entering the company.
  2. Right to appoint/remove directors: In the Model Articles, minority shareholders do not have the right to appoint or remove directors, whereas a shareholders’ agreement can contain such a clause.

Disadvantages of a Shareholders’ Agreement

There is no doubt that a shareholders’ agreement has numerous advantages, but there are a few disadvantages to having such a contract in place, these are as follows:

  1. Less flexibility: Having a contract in place for how shareholder relationships and the company is governed can be seen as preventing the company from being run in a flexible way.
  2. Increased minority shareholder protection: This can be seen as a disadvantage to the majority shareholders who own the highest proportion in the company, as it allows the minority further protection than in the articles.
  3. Harder to amend a shareholders’ agreement: Generally, in order for a shareholders’ agreement to be amended, it requires all of the shareholders to agree. Whereas, amending the articles usually only requires 75% to agree.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information, our corporate  team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team. Alternatively, please submit a quote through our website at https://www.greenawayscott.com/get-a-quote.

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