A Shareholders' Agreement is a legally binding contract between the shareholders of a company. It governs the relationship between the shareholders in order to protect the interests of the individual shareholders as and against each other.

A Shareholders' Agreement is of crucial importance in any company where there is more than one shareholder. It provides a level of protection for the shareholders involved in the company and establish a fair relationship between them.

The Articles of Association generally do not offer a shareholder full protection, thus Shareholders’ Agreements are often used to give protection to shareholders because they provide for what happens if ‘things go wrong’, if there is a falling out between the shareholders.

If a Shareholders’ Agreement does not exist, then any disputes between shareholders/directors will have to be settled by what is contained within the Articles of Association. The Articles of Association are one of the two constitutional documents of a company. The Articles set out the rules as to how a company is run; for example: setting out the division of power between the shareholders and directors and the rights which each will have. Some of the problems with having no Shareholders’ Agreement and just relying on the Articles of Association are as follows:

• There is nothing to prevent a director from being removed by 50% of the shareholders by an ordinary resolution;
• in law a Company cannot promise to do or not to do certain things. A Shareholders’ Agreement could be worded to bind the Company;
• all major executive decisions by the directors are made by a majority, including decisions to change the nature of the business. Therefore even though they may be a majority shareholder, as a single director they could be outvoted;
• even if the Articles are made to protect shareholders, they can be amended by a 75% majority of the shareholders, in which case they could take any protection away by passing a special resolution;
• there is generally no market for the shares of a private company, and a shareholder who is unhappy at the way a company is being run does not have the option of selling those shares;
• it is very difficult to deal with the resolution of any deadlock through the Articles.

These are only some of the problems which shareholders may face if there is not a Shareholders’ Agreement in place to regulate and protect their position. A Shareholders’ Agreement can contain detailed provisions to cover such issue and it also gives a contractual remedy if its terms are broken.

This Shareholders' Agreement – Equal Shareholdings template is designed to protect the interests of Shareholders with equal shareholdings (i.e. 2 shareholders holding 50% each of the shareholding or a company with 3 shareholders who all hold 1/3 of the shares each). In other words, this Agreement is designed for private companies in which each shareholder owns an equal share, so that there are no minority or majority shareholders. This comprehensive Shareholders' Agreement includes clauses dealing with the transfer of shares in the company, pre-emption rights on a transfer of shares where any party to the agreement who subsequently wishes to sell their shares must first offer the shares to the other shareholders, and it also includes a Deadlock Clause which determines how disagreements on key issues are to be resolved. Finally, a Confidentiality Clause and a Non-Compete, Non-Solicitation and Non-Poaching Clause have also been included in the agreement to safeguard the interests of the company.

Please note that it is advisable to use this Shareholders’ Agreement with a specifically drafted set of Articles of Association or to amend the Articles of Association so as to avoid inconsistencies between the two documents.