The Importance Of Shareholders’ Agreements In Family Businesses

7th January 2020

What Is A Shareholders’ Agreement?

A shareholders’ agreement is a private contract between the shareholders and the company. It regulates the way in which the company is run and arrangements as between shareholders. Unlike a company’s articles of association, a shareholders’ agreement does not need to be filed with Companies House and is kept confidential.

Why Is A Shareholders’ Agreement So Important?

As the directors control the day to day running of a company, the shareholders’ agreement can hold the directors to account for certain actions, compel directors to seek consent on important decisions and protect the interests of minority shareholders. In the absence of a shareholders’ agreement, minority shareholders with less than 26% equity have very little statutory protections.

In family businesses, a well thought through shareholders’ agreement can provide a sensible framework for the family to follow in the event of any disagreement, reducing the risk of heated family arguments. It should also prompt some discussion around succession planning to enable the business to stay within family ownership without preventing its growth and development.

What Provisions Does A Shareholders’ Agreement Usually Contain?

Although there are many different provisions that can be included, a shareholders’ agreement for a family business will usually contain:

Share valuation provisions

It is common to provide a method for calculating a fair value of the shares to prevent any dispute as to price, should a shareholder wish to sell their shares.

Pre-emption rights on transfer

These rights ensure that if a shareholder wishes to sell their shares, they must be first offered to the existing shareholders, before they are offered elsewhere. This provision is important as it allows the shareholders to maintain control of who owns shares and prevent dilution. In a family business there may be further controls to prevent a transfer out of the family group.

Veto rights on reserved matters

In addition to the limited statutory controls under the Companies Acts, shareholders can also agree that other decisions that could significantly impact the company such as financing or strategic decisions, should also require a set percentage before they can be undertaken. This is usually achieved by including a voting rights clause required a percentage of between 75% to 90% of shareholders to be in agreement before certain decisions can be undertaken.

Non-competition & non-solicitation restrictions

Given the information available to shareholders, particularly in an owner managed business, it is common to restrict those shareholders from competing with the company and from soliciting key employees, customers and suppliers during and for a certain period after ceasing to be a shareholder.

If you wish to discuss any of the issues raised in this article please contact Henry Maples, Partner at Murrell Associates on 01872 226998 or henry.maples@murrellassociates.co.uk.