SHAREHOLDERS AGREEMENTS
Purpose of SHA
Initial venture: 2 or more decide to set up limited liability company – set out how they will decide
matters irrespective of shareholdings.
Joint venture: Entrepreneur / business with experience and another party who sees opportunity and
provides capital. E.g. Ocado – ex-investment bankers and JLP or Sony Ericsson – 50/50 gadget and
telecommunications. SHA details what they are contributing and precise terms.
Venture capital investment: Institutional investor / high net worth individual invests in company =
SHA sets out what will get in return for investment and how to exit if do not get this return.
Private equity buyout: Private equity house acquires a struggling business (using limited liability
company as the purchasing vehicle), retains senior managers who become SHs with the private equity
house – SHA regulates relationship.
Relationship to Articles
Use a SHA as extension to A’s – can contain provisions A’s not allowed to contain.
SHA acts as contract between some or all of the SHs – agree between themselves how to act
(personal).
A’s act as contract between company and SHs (S.33 CA 2006) – not personal rights and obligations.
A’s have to follow the CA 2006 (cannot fetter company’s statutory powers), e.g. can only require an
OR to remove a D – unanimous would be void (S.168).
But SHA can go beyond – no D can be removed without unanimous consent of SH, can make a private
agreement.
But if breach SHA and remove D by simple majority then company must accept that vote, other SHs
would just have remedy for breach of contract, consequently tend to stick to SHA – minimises the
effect of majority rule.
If SHs agree to restrict Company’s statutory powers then company cannot be a party to it, but can be
a party to positive obligations, e.g. to repay loans made by SHs (must be a party to be contractually
bound) – add clause in recitals to say Company is a party to specified severable clauses.
Russell v Northern Bank Development: SHA included clause preventing an increase in share capital
without consent of all parties to SHA, defendants claimed this unlawfully fettered the company’s
statutory power to alter A’s by SR. held it was enforceable as a private agreement and that the part of
the agreement including the company (thereby unlawfully fettering its powers) could be severed.
SHs can only enforce rights against the company that are relevant to their capacity as SHs (right to
vote or receive a declared dividend) and can only enforce rights against other SHs through the
company – need a SHA to enforce directly against SH.
SHA can be kept private – put any commercially sensitive terms there, not in public A’s.
Need SR to amend the A’s (S.21) so minority (under 25% cannot prevent changes), but usually require
changes to SHA to be unanimous – veto right for minority SH.
Typical Provisions
General Terms:
Be careful to differentiate between capacity as SH and D’s – cannot fetter Ds (effectively the
company).
Terms duplicated in the A’s and SHA must be consistent and state that in the event of a conflict SHA
prevails.
Veto Rights
List certain matters as requiring consent of all / certain number of SHs:
Change in A’s
Change in registered office / auditors / company name / accounting reference date
Borrowing over a certain threshold
Purpose of SHA
Initial venture: 2 or more decide to set up limited liability company – set out how they will decide
matters irrespective of shareholdings.
Joint venture: Entrepreneur / business with experience and another party who sees opportunity and
provides capital. E.g. Ocado – ex-investment bankers and JLP or Sony Ericsson – 50/50 gadget and
telecommunications. SHA details what they are contributing and precise terms.
Venture capital investment: Institutional investor / high net worth individual invests in company =
SHA sets out what will get in return for investment and how to exit if do not get this return.
Private equity buyout: Private equity house acquires a struggling business (using limited liability
company as the purchasing vehicle), retains senior managers who become SHs with the private equity
house – SHA regulates relationship.
Relationship to Articles
Use a SHA as extension to A’s – can contain provisions A’s not allowed to contain.
SHA acts as contract between some or all of the SHs – agree between themselves how to act
(personal).
A’s act as contract between company and SHs (S.33 CA 2006) – not personal rights and obligations.
A’s have to follow the CA 2006 (cannot fetter company’s statutory powers), e.g. can only require an
OR to remove a D – unanimous would be void (S.168).
But SHA can go beyond – no D can be removed without unanimous consent of SH, can make a private
agreement.
But if breach SHA and remove D by simple majority then company must accept that vote, other SHs
would just have remedy for breach of contract, consequently tend to stick to SHA – minimises the
effect of majority rule.
If SHs agree to restrict Company’s statutory powers then company cannot be a party to it, but can be
a party to positive obligations, e.g. to repay loans made by SHs (must be a party to be contractually
bound) – add clause in recitals to say Company is a party to specified severable clauses.
Russell v Northern Bank Development: SHA included clause preventing an increase in share capital
without consent of all parties to SHA, defendants claimed this unlawfully fettered the company’s
statutory power to alter A’s by SR. held it was enforceable as a private agreement and that the part of
the agreement including the company (thereby unlawfully fettering its powers) could be severed.
SHs can only enforce rights against the company that are relevant to their capacity as SHs (right to
vote or receive a declared dividend) and can only enforce rights against other SHs through the
company – need a SHA to enforce directly against SH.
SHA can be kept private – put any commercially sensitive terms there, not in public A’s.
Need SR to amend the A’s (S.21) so minority (under 25% cannot prevent changes), but usually require
changes to SHA to be unanimous – veto right for minority SH.
Typical Provisions
General Terms:
Be careful to differentiate between capacity as SH and D’s – cannot fetter Ds (effectively the
company).
Terms duplicated in the A’s and SHA must be consistent and state that in the event of a conflict SHA
prevails.
Veto Rights
List certain matters as requiring consent of all / certain number of SHs:
Change in A’s
Change in registered office / auditors / company name / accounting reference date
Borrowing over a certain threshold
