Shareholders’ Agreement

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A Shareholders’ Agreement is a legal contract that sets out the rights of a company’s shareholders and offers protection to each and all of these individuals. Once a company has more than one shareholder it is important to have an agreement like this in place because standard company law may not quite fit a company’s particular circumstances.

The key individuals in a company often rely on the Articles of Association, one of two constitutional documents, to protect their rights but in truth these do not cover shareholders’ rights completely or in every situation. In the absence of a shareholders’ agreement some potential issues that can arise are:

  • Removal of a director by half the shareholders passing an ordinary resolution;
  • Directors’ versus members’ rights in key areas such as pay, benefits and dividends;
  • Significant decisions being made by a majority of directors, overruling individual directors who may be majority shareholders;
  • Conflict over the direction of the business;
  • Disagreements about the shareholders’ exit strategy;
  • Amendment of the Articles of Association stripping away shareholders’ protections by a 75 percent majority of shareholders;
  • Deadlock resulting in a failure to resolve disputes that goes on to affect the smooth running of the company.

To avoid these and other issues, a Shareholders’ Agreement is usually put in place to protect all parties. The three most common agreements are:

Shareholders’ Agreement – Protection Minority Shareholders

Designed for companies with both minority and majority shareholders and where new shareholders are joining or the company wishes to change the terms of the existing relationship. These agreements protect the interest of shareholders with less than 50 percent of the company’s issued share capital. Generally, minority shareholders are in a weak position under company law as a simple majority will overrule them in most cases. This is not always appropriate. For example, in cases where an outside investor, such as an angel investor, is involved with the company, this party will often want more rights than standard company law allows. Having a Shareholders’ Agreement – Protection Minority Shareholders in place sets out the rights and duties of the shareholders and covers aspects such as the appointment of directors and how directors’ decisions are made. It also provides for shareholders to be directors, as this is not automatic under company law, and can cover other important aspects such as share transfers, confidentiality clauses, non-compete, non-solicitation and non-poaching clauses.

Shareholders’ Agreement – Protection Majority Shareholders

This legally binding contract protects those with more than 50 percent of the issued share capital in the company and is designed to cater for situations where new shareholders are joining the company or the relationship between shareholders is changing. The agreement covers the key aspects of shareholder rights including share transfers, a drag-along clause (ensuring minority shareholders cannot obstruct a sale of the company), confidentiality, non-compete, non-solicitation and non-poaching clauses.

Shareholders’ Agreement – Equal Shareholdings

This type of agreement is extremely useful in cases where two or more shareholders have an equal stake in the company, such as two shareholders each holding 50 percent of the company or three directors holding one-third each, common occurrences when firms are starting out. The Shareholders Agreement – Equal Shareholdings sets out the rights and obligations of all shareholders with respect to share transfers, how to deal with deadlock situations, along with confidentiality, non-compete, non-solicitation and non-poaching clauses.

Commercial Property Q&A

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I’ve received a commercial tenant’s application to assign a lease. I don’t like the sound of the proposed assignee can I simply ignore the request?

Statute prescribes that where landlord’s consent for an assignment is required a landlord must give consent unless it is unreasonable to do so and this must be done within a reasonable time. Case law has for several years suggested that reasonable time would be about 28 days however following a judgment in 2003 this could be as little as a week (if it would be unreasonable  to refuse consent). A property litigator can advise you as to whether you can properly withhold consent by considering the case law in light of the facts and checking the lease for whether there are any conditions to which Landlord’s consent to assign is subject.

I have an assured short hold tenancy. How much notice does my landlord have to give me to terminate occupation before issuing proceedings?

To end a short hold tenancy at the end of a fixed term using a section 21 notice,  2 months’ notice must be given on or before the end of the contractual term. The landlord cannot issue proceedings under section 21 until the fixed term is over.  If the AST has expired and now operates as a periodic tenancy at least 2 months must be given expiring on the last day of the tenancy. If the landlord serves a section 8 notice then there could be as little as no notice period, 14 days or 2 months depending on the grounds for termination cited.

I want to rent my commercial premises out but do not wish to grant the tenant rights offered by the Landlord and Tenant Act 1954 to remain in the Premises upon termination of the Lease. What can I do?

You can serve on the proposed tenant a notice in the prescribed form containing a health warning which explains that the tenant will not have the benefit of security of tenure once the lease ends. Crucially the notice must be served before the lease is granted but also before the tenant becomes contractually bound to enter it e.g. agreement for lease (but after lease terms are agreed).

Depending on the notice period the tenant must either then sign a declaration or swear a statutory declaration in the prescribed form, confirming that the tenant understands the significance of what s/he is signing. The new lease must refer to the service of the Notice; the Declaration and the agreement to exclude the provisions of sections 24-28 of the Act.