Shareholder Agreements

Shareholders have little rights in comparison to directors of a company who make the majority of decisions and are commonly involved with the day to day running of a company. However shareholders do have the power to make important decisions regarding a company such as appointing and removing directors. Shareholder agreements define shareholder rights and usually contain the following clauses:

Positive obligations:Â A number of clauses in an agreement will essentially lay down the rules about voting on certain matters. Shareholders formally agree that by jointly exercising their voting powers they shall carry out tasks concerning the funding, development and running of the business, examples include:

  • The terms of employment for directors
  • The amount of company profit that shall be paid out as dividends

Routes to resolving potential disputes:Â agreements may detail dispute resolution procedures such as:

  • Use of third party experts or arbitrators.
  • A buy out mechanism (i.e. in the event of a disagreement one side may buy out the shares of the other).
  • In the case of irreconcilable issues, the parties agree to wind up the company.

Rights of veto:Â A clause may be inserted that certain activities may only be carried out if all shareholders agree to them. Examples include:

  • Amending the articles.
  • Issuing more share capital.
  • Purchasing premises.

Transfer and issue of shares:Â agreements commonly contain detailed rules on the process of transferring and issuing shares.

The clauses in a shareholder agreement may overlap with other parts of the constitution of a company such as service contracts for directors and the articles of association, therefore professional legal advice is highly recommended to avoid any inconsistencies and compliance with current legislation. Lawdits commercial department offer comprehensive help and advice on all aspects of commercial law.

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