Shareholder agreements vital

• Published date: 16 March 2022

Today we will look at some of the key concepts to include in a shareholders agreement — or constitution, which is a similar document

Most shareholders agreements will have "preemptive rights" on transferring or issuing shares. There are also some concepts that change for each business, including who can appoint directors, how decisions are made and what shareholders can't do.

Two common features of a shareholders agreement

Most shareholders agreements will restrict how the company can issue new shares, and how shareholders can transfer their shares.

A company may want to issue new shares to raise more money, or to pay and incentivise its workers. But most shareholders want some limits on this.

If the company can issue shares however it likes, a shareholder can end up with less ownership of the company than they intended (i.e. their shareholding is "diluted").

There is also the risk that the company issues shares cheaply, which is unfair to other shareholders. Generally a shareholders agreement will provide that the company must offer any new shares to existing shareholders first unless a majority of shareholders approve otherwise.

These are called "preemptive" rights, as you essentially get an early chance to get more shares before outsiders can invest.

We usually see a similar position for transfers. When you are in business with someone, you don't necessarily want them to leave the business and have someone new come in to make decisions.

Often each shareholder will agree they need to offer their shares to the other shareholders first before selling shares to anyone else. Somewhat confusingly, these are also often called "preemptive rights". There might be some permitted exceptions, like transferring your shares into a trust or to a relative.

Without these standard clauses, you can end up stuck in a business with someone you don't get on with. Or you can end up owning far less of a company than you expected to.

This can also negatively impact on the business itself — at its worst it can be the death of a business entirely. It is important to check whether your shareholders agreement (and constitution) has preemptive rights on issuing and transferring shares.

Adapting clauses for your firm

Half of a shareholders agreement might be somewhat "standard" wording, but the other half is for you to customise.

These decisions will depend on what the business does, how many shareholders there are and what your growth plans are.

A good starting point is deciding...