An Overview of the Shareholders Agreement from a Shareholder Agreement Solicitor
In “A Beginners Guide to the Shareholder Agreement”, Solicitor Mark Glenister introduces the key role that a shareholders’ agreement plays in governing relationships between shareholders and protecting a company’s future. He frames it as a bespoke “rule book” for good times and bad, explaining how it complements a company’s articles of association (which are public) by allowing confidential, tailored terms. The video walks through the critical concerns founding shareholders often face — control, veto rights, pre-emption on new share issues, exit mechanisms, deadlock procedures, and handling events such as death or incapacity. Ultimately, it underscores how a robust shareholders’ agreement helps manage conflict risk and ensures clarity and fairness as a business evolves.
No Sound? Here’s the transcript…..
A Beginners Guide to Shareholders Agreement from the perspective of Mark Glenister, a Shareholder Agreement Solicitor
Just think of a shareholders agreement as a rule book for running the business in good times and bad. It’s a contract between the shareholders and the company. It can be linked to the business plan and contains mechanisms for avoiding disputes and dealing with them cost-effectively.
The need for a shareholders agreement often comes into focus as the business grows beyond the founding shareholder or shareholders. Of course, all limited companies have articles of association, and they can be amended to cover many of the things which usually appear in a shareholders agreement. However, the articles of association are a public document, and most businesses want to keep some of their arrangements confidential.
So what are the founding shareholders usually concerned about? In a word it’s control. At the early stages of a business, it’s easy to lose sight of the fact that it’s the directors and not the shareholders who run the business. The founding shareholders should definitely consider protecting their own interests by putting in place a shareholders agreement before they own less than seventy-five percent of the shares in the company and before they are outnumbered on the board of directors of the company.
So why is it so important at this moment? Well, a board of directors decides things as a majority. What things should the founding shareholders want to retain control over as the business grows and outside shareholders and directors join the business. The sale of existing shares by the shareholders. Or the issuing of new shares to new shareholders by the Board of Directors Also stopping departing shareholders competing with the business for its existing clients, prospects and key members of staff. While the founding shareholders remain the majority, they will want to be able to force the minority shareholders to sell if an interesting offer comes their way. Equally as they move towards being the minority shareholders they’ll want to ensure that they are included in any sale by the majority shareholders.
The founding shareholders will want to include clear rights of veto in the shareholders agreement over things which are fundamental to the business so the Board of Directors can’t decide on their own without getting prior shareholder approval. Equally if the company has equal numbers of founders who are also directors, they should think about including anti deadlock measures within their shareholders agreement.
So if deadlock can be bad for a business what happens if things really go wrong? What should the business do if a shareholder director dies or becomes too unwell to work in the business or is made bankrupt. There are a number of choices to be made. Should the shareholder or the deceased shareholders estate be forced to sell shares to the other shareholders? If so at what price? Should the shareholders put in place life insurance in advance to fund the purchase of shares in these situations? Or should the unwell shareholder or his estate be able to keep his shares?
These are all the kinds of things that need to be thought through thoroughly. How did the other shareholders feel about being in business with perhaps the widow or widower of one of their former shareholders? How would they feel if one of the shareholders can’t regularly come to work and perform his or her usual duties?
Finally a good shareholders agreement should contain a mechanism for dealing with disputes. The better the shareholders know each other the more they need a robust shareholders agreement. It’s often much more difficult for close friends, close colleagues and family members to resolve disputes rationally than it is for people who are simply in business together.
That’s why the better the shareholders know each other the more important it is that they have a shareholders agreement.
