Shareholders dust off agreements in case of disputes

Current uncertainties are a potential threat to the future of their business

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Shareholders/directors in many companies are finding the current uncertainties – inflation, staff shortages, energy crisis etc – a potential threat to the future of their business and are checking out their shareholders' agreement to make sure it gives them a way out in the event of difficulties.

Minority shareholders can be shocked to discover how few rights company law gives them if there's a dispute – for example, if the company changes strategy, or money is diverted to provide salary or other benefits to the majority at the expense of the minority.

Particularly, the minority have no rights under UK company law to control day-to-day decisions, to insist that profits be paid out to the shareholders as dividend, or to buy out the shares of another shareholder who decides to leave the company, unless there is a specific agreement that they should.

Worse, majority shareholders can always remove any director, including one who is a minority shareholder, whatever the director's contract of employment says (though it can be expensive if the removal is a breach of that contract and the director sues for compensation).

If you have a shareholders' agreement though, it will have varied or supplemented the default company law rules to give minority shareholders' greater rights. Ordinarily, it will cover key issues like:

  • The activities the company will carry on.
  • Intended 'exit routes' for the shareholders – trade sale to a third party, passing the company on to family members or employees, flotation, etc – and when you aim to exit.
  • Dividend policy ie the proportion of profits to be paid out to shareholders compared to the proportion to be retained to fund the business.
  • Who is entitled to serve on the board and senior management team and participate in running the company, their remuneration and other terms of employment.
  • How the company will raise funds if needed in the future (eg how much extra each shareholder will put in, whether third parties will be allowed to buy shares, and on what terms).

The agreement usually then binds each shareholder to vote to achieve what you have agreed. It may also give each shareholder, including minority shareholders, a right to veto important decisions, such as:

  • altering the company's share capital or changing its activities
  • buying or selling the company's business or businesses, or significant assets
  • buying or selling premises
  • appointing or removing a director from office, awarding any employee more than a certain salary, or sacking anyone earning more than a certain salary
  • borrowing above a certain level, or granting a mortgage over company assets
  • entering into capital or hire purchase contracts above a certain level
  • taking out insurance other than for full replacement value
  • buying any of the company's shares back from a shareholder
  • taking action to wind the company up.

On an issue or transfer of shares, the agreement may allow minority shareholders a complete veto, or require the shares to be offered to existing shareholders pro rata. Agreeing how shares will be valued is critical to avoid disputes on transfers later.

Agreements may also contain a mechanism for resolving disputes, such as referral to a third-party expert or arbitrator, or a buy-out mechanism so that, if a dispute can't be sorted out, one side buys out the shares of the other, valued as per the agreement.

Agreements can also deal with a wide number of other company issues - for example how profits are to be distributed, and protections for the business against unfair competition.

Shareholders/directors with a shareholders' agreement should make sure they know what their rights and obligations are.

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Further resources

Read ACCA’s factsheet on shareholders’ agreements

Read ACCA’s factsheet on partnership agreements