What is a Shareholder’s Agreement?

A shareholders agreement is a contract between the owners of a company that defines their roles, rights and obligations as shareholders in the company wherein it specifies the appointment of managing shareholders, creates rules for appointing and terminating company officers and sets out requirements for board and shareholder meetings, shareholder duties, entitlements and rights to information and dividends.

Shareholders agreement is a best way to prevent conflict and protect the interest of the shareholders and it is the best way to ensure stability and continuity of the operations of the company in case of a dispute and conflict. Unlike the Articles of Association, Shareholders Agreement is a confidential document which covers key issues such as company administration, the company’s officers, new share issues, day-to-day management, decision making and leaving shareholders. It is highly imperative for the shareholders to put a shareholder agreement in place at the earliest possible or as soon as first shares are issued.

What is a Shareholder’s Agreement?

Shareholders Agreement can be used:

  • When you and other individuals are shareholders in a private limited company.
  • To supplement the company’s Articles of Association with the provisions related to the shareholders’ powers and entitlements.
  • To ensure that the additional provisions are kept confidential in a private contract.
  • To change provisions in the future without having to amend the articles of association.

A shareholders’ agreement is an agreement between the shareholders of a company and it can either be between all or some of the shareholders, for example, the holders of a particular class of share. The main aim behind having a shareholders’ agreement in place is to protect the investment of shareholders in the company while maintaining a fair and healthy relationship between the shareholders and to govern the normal operation and run of a company.

A shareholders’ agreement will:

  1. Set out the shareholders’ rights and obligations.
  2. Regulate the sale of shares in the company.
  3. Describe how the company is going to be run.
  4. Provide an element of protection for minority shareholders and the company; and
  5. Define how important decisions are to be made.

How does a Shareholders’ Agreement Help in Case You Are A Minority or A Majority Shareholder?

Shareholders’ Agreement in case you are a minority shareholder:-

Company’s Articles of Association does has a provision to protect the interest of the minority shareholders, in general practice, without having a shareholders’ agreement in place, they don’t have much of a say in the major decision making of the company. In case you are a minority shareholder and have a shareholders’ agreement in place which includes the requirement of all shareholders to consider and approve certain decisions, ensures that you do have a say in the important decisions concerning the company.

Shareholders’ Agreement in case you are a majority shareholder:-

In case you are a majority shareholder, i.e. if you hold most of the shares of the company, and want to sell your shares but a minority shareholder is unwilling to agree then in this case, having a provision in the shareholders’ agreement is important. This is also referred to as a “drag along” provision.

Apart from this, shareholders’ agreement helps in handling various other issues like where one of your fellow shareholders want to transfer their shares to anyone, which could cause problems for you and the other shareholders, especially if the sale is to a competitor or someone else you do not want to get involved in the company and its affairs.

To overcome and handle situations like these, shareholders’ agreement will often include rules around share sales and transfers i.e. shares can be transferred to whom, on what terms and at what price.

What All Should Be Included in a Shareholder’s Agreement?

What all you can ask to include in a shareholders’ agreement depend on your level of shareholding and the number of your fellow shareholders, however there are certain important provisions which one should consider including in a shareholders’ agreement such as:

What All Should Be Included in a Shareholders’ Agreement?

  1. Issue and transfer of shares- including provisions to prevent unwanted third parties to acquire shares and how a shareholder can sell his or her shares.
  2. Protection of minority shareholders and to ensure that certain decisions to be agreed by all the shareholders.
  3. Payment of dividends on the shares.
  4. Procedures related to dispute resolution.
  5. Competition restrictions.
  6. Functioning of the company i.e. appointing, removing and paying directors, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company.

What is Share Certificate?

A share certificate is a certificate issued by a company which certifies that on the particular date the certificate is issued, a certain person is the registered owner of the shares of the company and it holds following key information:

  1. The name and the address of the shareholder
  2. The number of shares held
  3. The class of shares
  4. The amount paid or treated as paid on those shares

What is Share Certificate?

In terms of the Companies Act 2006, it is considered prima facie evidence i.e. sufficient evidence unless the contrary is shown in Scotland of the member’s ownership of shares in the company. A share certificate can be issued by a company however it is its entry in the register of members that provides legal proof of ownership of shares in the company. So, one need to refer to the register of members to make sure that the share certificate and entry in the register of members is consistent.

When does a Share Certificate Need to be Issued?

Unless mentioned in the company’s Article of Association otherwise, share certificate needs to be issued within the legal time for issuing the same, which is two months. Once the initial registration of the company is done, company share certificates must be issued to its shareholders within two months and it is usually done as a part of the first board meeting.

A company must thereafter, within two months of allotting shares, issue the share certificate representing those shares and two month time. A share certificate is issued to the registered shareholder and it is not mandatory to send its copy either to the Companies House or Her Majesty’s Revenue & Customs (HMRC).

Before a share certificate is issued, it is important to check the company’s Articles of Association for any specific requirements which need to be mention in the certificate. Generally it is a standard practice to issue one share certificate for the shares issued at a particular time, unless requested by the shareholders for the separate ones. In case of a joint shareholding, it is good to include the name of each separate holder on the certificate.

Template of a Share Certificate:

It is highly mandatory of a share certificate to be dated on its issue and the key points that should be included as part of a share certificate template is as below:

Template of a Share Certificate

  • A share certificate number, which is unique.
  • Name of the company.
  • Company’s registration number.
  • Registered office address of the company.
  • The name of the shareholder.
  • The address of the shareholder.
  • The number of shares covered by the shares certificate
  • The type or class of shares.
  • The extent to which the shares are paid up (usually shares will be fully paid)

And it should be signed by:

  • Two company directors; or
  • One director and the company secretary; or
  • For companies who have a single director and no company secretary, the company director in the presence of a witness who attests to his or her signature.

What is a Share Sale Agreement and What Documents are Needed in a Share Sale Agreement?

The main document that governs any or all significant sale of shares in a limited company is commonly called as a Share Purchase Agreement or SPA, also called or known as Share Sale Agreement. The terms and complexity of the SPA will vary depending on the nature and circumstances of the transaction, but typically, it is a lengthy document, wherein half or more of it can be devoted to a schedule of warranties. A share sale agreement is normally drafted by the sellers’ solicitors because it has to be on the seller’s terms and conditions and the prospective buyers are then asked to make their offer based on the pre-prepared contractual documentation, although the terms and conditions mentioned in the Share Sale Agreement can be further negotiated with a potential buyer.

A Share Sale Agreement need to have below mentioned documents:

1. Disclosure Letter: A disclosure letter is produced by the seller in relation to all the warranties detailed in the Shares Sale Agreement. Disclosure letter, for it to be effective, needs to be full, clear and accurate and must identify and address the nature and scope of the matter disclosed and a detailed read of the same should provide a complete understanding of the issue to the buyer.

2. Stock Transfer Form: A stock transfer form is a two page document which has to be filled in by the seller with the details such as the name of the company, name of the person who is transferring the share i.e. the transferor, name of the transferee, number of shares and price per share in picture. It should also include the name and address of the person who is receiving the shares, although they need not to sign on the stock transfer name. Their name in the document declares them to be the legal next owner of the shares.

In case the value of the transfer is more than £1,000 then the buyer needs to pay the stamp duty on the form at 0.5% of the total amount rounded up to the nearest whole £5. It is then sent to the concerned stamp office of Her Majesty’s Revenue & Customs where it gets stamped and sent to the buyer of the shares. However, the stamp duty needs to be paid within 30 days after the transaction of share takes place.

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