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Shareholder Agreements for SMEs

Shareholder Agreements for SMEs
7 November 2017

A shareholder agreement is a legal contract entered into between shareholders in a (limited liability) company which regulates their relationship. A shareholder agreement protects shareholders by setting out what happens if things go wrong or the shareholders have a disagreement.

When starting up a business with friends or family it's far too easy to avoid discussing the details of how your company will be run. Even more difficult is a discussion about what to do if things go wrong and how to manage business disagreements. It pays to spend a bit of time, early on, talking about these things and getting a good Shareholder Agreement agreed and signed.

Constitutional documents

It is not a legal requirement to have a written shareholder agreement because the relationship between the shareholders and the shareholders and the company is governed by the company's constitutional documents. In the UK, these are:

  • the Memorandum of Association, and
  • the Articles of Association.

The Memorandum contains simply the names of the subscribers to the company and authentication that they have agreed to become members of that company. The Articles of Association is a much more substantial document: it sets out the company's objects, liabilities and assets. It also outlines the rules for how the company will operate and sets out procedures for board meetings and how dividends will be shared etc.

The company's constitutional documents must be filed at Companies House and these documents are available to the general public to view.

A Written Shareholder Agreement

Although a written shareholder agreement is not a legal requirement, it is common practice to have one to supplement the Memorandum and Articles. A shareholder agreement template can include additional specific arrangements relating to the transfer of shares or dividend policy. The terms of a shareholder agreement template are confidential as the document does not have to be publicly filed anywhere.

Most shareholder agreement templates contain a 'conflict with Articles' clause which states that in the event of a conflict between the Articles and the terms of the shareholder agreement, the terms of the shareholder agreement template prevail.

Problems by Not Having a Shareholder Agreement

There are disadvantages to not having a written shareholder agreement and relying solely on the Articles of Association. These are:

  • a director can be removed by ordinary resolution by 50% of the shareholders
  • all directors' decisions need to be made by a majority so a majority shareholder could be outvoted
  • the Articles of Association can be amended by a 75% majority vote by the shareholders which would mean that a special resolution could be passed which would remove minority shareholder protection rights
  • without detailed provisions relating to the resolution of 'deadlock' it can be very difficult for decisions to be made.

Details to be included in a Shareholder Agreement

A shareholder agreement should contain the following general details:

  • the company's registered office
  • the company's auditors
  • the company's bankers
  • the name of the company secretary if there is one.

The shareholder agreement should also include the following clauses:

  • business of the company
  • directors' meetings
  • management decisions (which will typically include detailed deadlock provisions)
  • directors
  • transfer of shares
  • dividend policy
  • conflict with Articles
  • winding up
  • termination
  • confidentiality


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