Ask the Expert
Ask the Expert Michael Pope, Solicitor at Grant Saw Solicitors LLP, looks at shareholders’ agreements – what they are, why you would need one, what should be included, what happens if a shareholder wishes to amend an agreement, what to do if there is a breach, who should sign the agreement and tag-along and drag-along rights. 1. What is a shareholders’ agreement? A shareholders’ agreement is a legally binding document that outlines the rights and responsibilities of shareholders in a company. It typically covers issues such as ownership percentages, decision-making processes, dividend distribution, dispute resolution, and transfer of shares. The agreement helps maintain clarity, protect shareholders' interests, and govern the relationship between shareholders to ensure a smooth operation of the company.
2. Why do I need a shareholders’ agreement? A shareholders' agreement is extremely important for the protection of the interests of all parties involved in the ownership of the company. It clarifies shareholders' rights and obligations, outlines decision-making processes, and addresses potential disputes. By establishing rules for ownership transfer, dividend distribution, and confidentiality, it ensures a smooth operation of the business. The agreement helps prevent conflicts, provides a clear framework for resolving disputes, and maintains a cohesive vision among shareholders, fostering a stable and successful business environment.
3. What should a shareholders’ agreement include? A comprehensive shareholders' agreement should cover aspects such as shareholders' rights and responsibilities, ownership
percentages, decision-making procedures, dividend policies, dispute resolution mechanisms, restrictions on share transfers, confidentiality clauses, and the management of the company. It should also address matters related to board representation, exit strategies, non-compete provisions, and the procedures to amend the agreement. A well-drafted agreement ensures clarity, safeguards interests, and facilitates smooth collaboration among shareholders.
the breaching party to fulfil their obligations, or compensation for any losses incurred. In some cases, the agreement may also include provisions for alternative dispute resolution, such as mediation or arbitration, to resolve the breach amicably.
4. What happens if the shareholders want to amend the agreement?
6. Who should sign the shareholders’ agreement?
If shareholders wish to amend the shareholders' agreement, they must follow the procedures outlined in the existing agreement. Typically, this involves written consent from a specified majority of shareholders, often requiring a majority vote. Once the required approval is obtained, the amendment becomes effective and legally binding.
All shareholders of the company should sign the shareholders' agreement. This includes both existing shareholders when the agreement is created and any future shareholders who acquire ownership in the company.
The updated agreement will then govern the rights and obligations of the shareholders, reflecting the changes made and ensuring continued clarity and adherence to the new terms.
5. What happens if there is a breach of the shareholders’ agreement? If there is a breach of the shareholders' agreement, the affected party may seek legal advice. The non-breaching party can file a claim to enforce the agreement's terms and claim damages. Remedies may include specific performance, where the Court orders
Signing the agreement ensures that all parties are bound by its terms and conditions, fostering a cohesive and legally binding framework for the business.
7. What are tag-along and drag-along rights? Tag-along rights give minority shareholders the option to join in on a sale of a significant portion of the company's shares, allowing them to sell their shares on the same terms. Drag-along rights enable majority shareholders to force minority shareholders to sell their shares along with them during a sale to a third party.
For more information, email michael.pope@grantsaw.co.uk or contact the team on 020 8858 6971. 19
