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Home » Awareness » Growing the business » What is a Shareholder Agreement?

What is a Shareholder Agreement?

A shareholder Agreement is a legally binding arrangement entered into between each of the shareholders in a company by which they agree how their relationship as shareholders will be regulated. 

It is possible to form a new company with others or to join an existing one with there being no contractual document in place regulating the relationship between the shareholders – the owners -  of a company. But this is not recommended. You cannot simply rely on the company’s Articles of Association. Whilst many of the issues dealt with in a Shareholder Agreement could also be dealt with in the Articles of Association, the Articles of Association are a public document, filed at Companies house and available for all to examine.  A Shareholder Agreement is private between the shareholders. It preserves confidentiality regarding the details of the agreement and the relationship between the shareholders. It can include a precedence clause so that any provisions in it as between the shareholders which conflict with the Articles have precedence over the relative Article. 

The Articles are a contract between the company and each of its shareholders. As such the Articles can only be enforced by or against the company and not by one shareholder against another. This can cause problems, particularly for minority shareholders who do not have sufficient voting power to procure the company to enforce the Articles against a shareholder who has breached the Articles. A Shareholder Agreement has the advantage of being a contract between the shareholders themselves and therefore can be enforced by one shareholder against another.  

Here is a summary of the differences between Articles of Association and Shareholder Agreement:- 

Articles of Association

  • Have to be filed at Companies House and are on the public record
  • Are governed by company law and binding on all members of the company
  • Can be changed by a resolution requiring approval from 75% of the shareholders
  • Personal rights and restrictive covenants are not valid  

Shareholders Agreement

  • Private and confidential document that does not have to be publicly disclosed
  • An agreement between the members of a private limited company, governed by contract law
  • Can be altered and/or terminated by agreement rather than having to comply with the formalities of the Companies Act
  • Personal rights, unenforceable in the Articles, are binding on all parties to the agreement 

The next Awareness article will look in more detail at why Shareholders Agreements are a good idea.

Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.