Shareholder Agreements

Shareholder agreements are usually entered into to protect minority shareholders.

English law generally recognises majority rule.  In other words, anyone owning over 50% of the shares in a company will be able to control that company.  That majority shareholder will usually be able to appoint and remove directors thus enabling him/her to control the board and he/she will also be able to pass ordinary resolutions at shareholder meetings.

Holding a minority of shares in a company, i.e. less than 50%, will give a shareholder no entitlement to be a director or to be an employee or to receive a dividend from the company.  There are laws protecting the rights of minority shareholders in the case of abuse by the majority but such rights are limited and expensive to pursue. If the abuse is by a majority of shareholders who control the company then they are unlikely to vote in favour of bringing proceedings against themselves.  That is why shareholder agreements are entered into to protect the rights of minority shareholders.  Such an agreement will give a minority shareholder the right to bring proceedings against the other shareholders regardless of the number of shares which he holds. 

Shareholder agreements are most appropriate in what are termed "quasi-partnership companies” where several people enter into business together under the structure of a limited liability company but where they all contribute to the business in one way or another.  A properly drafted shareholder agreement will deal with issues in relation to the management and organisation of a business, what happens should a shareholder die, who should have the right to acquire his/her shares and at what price, what should happen on the death, bankruptcy or mental incapacity of a shareholder, who has rights to appoint directors and the division of profits between salaries, bonuses and dividends.

Our advice would be that any minority shareholder should be protected by a shareholder agreement and this should, ideally, be entered into when the limited company is initially established. 

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