A COMPANY has articles of association that set out the basic management and administrative structure of a company, so why should shareholders have a separate agreement?

The short answer is that they offer a greater scope for governing the way a company is run than the articles of association do on their own.

The articles must comply with company law, whereas a shareholder agreement can include almost any terms the shareholders might wish, to regulate the relationship between them as shareholders as well as detailing how the company is managed.

A well-drafted shareholders agreement is a cost effective way of minimising the potential for expensive disputes between shareholders, as well as safeguarding the interests of shareholders and their families in a variety of circumstances.

The best time to have an agreement drawn up is on incorporation of the company or early in the company’s life cycle, when everyone is generally in agreement.

Over time the circumstances of the company and individual shareholders can change, which can in turn lead to disagreements and disputes. It is very difficult to negotiate an agreement once a dispute starts.

Each shareholders agreement should be tailored to the particular circumstances of the shareholders and the company, but the following are examples of issues often covered in a shareholder agreement.

•a contractual right to appoint a director, particularly for a minority shareholder.

•a pre-emption right to receive additional shares in the event of a share issue so that shareholding is not diluted.

•a pre-emption right to purchase existing shares where they are being transferred to avoid dilution.

•tag-along rights so that if the majority are selling their shares, the purchaser has to buy the minority shareholders shares.

•drag-along rights so that the majority shareholder can force the minority shareholder to sell if there is an offer to buy the company. This prevents a minority shareholder blocking a sale.

•compulsory purchase rights where a shareholder dies, is bankrupted or defaults in some manner.

•dispute resolution clauses that set out how a dispute between shareholders will be handled, to avoid costly litigation.

•restrictive covenants to prevent a shareholder setting up in competition, taking staff and stealing customers.

•and restrictions on who shares can be transferred to.

A further advantage of a shareholders agreement over the articles is that unlike the articles which are a public document available at Companies House, the agreement is a private matter between those that have signed to it.

Everys Solicitors has a wealth of experience in advising businesses. If you would like to speak to an expert, contact Sean Jenner on 01823-362881 or send an e-mail to sean.jenner@everys.co.uk