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Explanatory Notes
Shareholders Agreement - Three or More Parties
EXPLANATORY NOTES This is intended for use by the shareholders in a private limited company and sets out the basis upon they will conduct the business of the Company. Although a company's memorandum and articles of association contain rules for conduct of business, a shareholders agreement can be tailored to the particular requirements of the shareholders. It is also a confidential document whereas the memorandum and articles of association are available to the public at the Companies Registry. This document is designed for completion by individuals and the full names and residential address of each shareholder should be inserted. COMMENTS ON SPECIFIC CLAUSES 1. Interpretation This contains a number of defined terms and, in our draft, only the name of the Company needs to be inserted. 2. Business and Name of Company If the Company already exists the words in italics can all be deleted and a brief description of the business to be carried on should be inserted at the end of 2.1. If a new company is to be formed, the words in italics should be incorporated with the proposed name of the Company in clause 2.2. In this connection, it is sensible to make a check on the Companies House registry before deciding on the name since it is not permitted to register a new company if that name exists already. A check can be undertaken online of the Companies House website – www.companieshouse.gov.uk. 3. Name & Capital The authorised share capital of the Company is a maximum permitted amount, whereas the issued share capital is the amount (not exceeding the authorised capital) to be paid for by the shareholders. Clause 3.1 might, for example, refer to an authorised capital of £10,000 divided into 10,000 ordinary shares of £1 each. Clause 3.2 should be completed setting out the number of shares which each shareholder owns or will subscribe for (i.e. purchase), depending on whether the Company is already in existence or to be formed. In some cases, shareholders might contribute in kind rather than in cash – e.g. by bringing property or equipment into the business in return for the issue of shares. In that case, this clause would need to be restructured. Clauses 3.3 to 3.5 set out the basic principles concerning capital requirements upon which the Shareholders agree to run the Company. Clause 3.3 makes it clear that they intend to contribute any extra capital by way of loans rather than further shares. Clause 3.4 provides that, to the extent that this is achievable, working capital can be funded by way of an overdraft from the Bank rather than out of the shareholders' pockets. Since a bank is likely to require personal guarantees from the Shareholders, 3.5 specifies that any guarantees which are required will be provided by the shareholders on a pro rata basis – i.e. proportionate to their respective shareholdings. 4. Profits policy As drafted, this clause sets out the intention of the Shareholders to run the business for profit and to distribute as profits by way of dividend. Clearly, adequate reserves have to be made but the underlying objective is to generate profits for the shareholders. In some cases this wording would not be appropriate, for example if the intention is to put all profits back into the Company in order to grow the business. 5. Directors, Chairman and Secretary Depending on the arrangements between the shareholders, all or only some of them may be appointed as directors and this clause identifies the names of the shareholder directors and the name of the first chairman, who is likely to be one of those directors. Under U.K. law, a company can have only one director but it is usual to have more than one. There also has to be a company secretary and the name of that individual should be inserted in 5.3. Sometimes a firm of accountants will provide this service. Alternatively, the company secretary may also be a director. Clause 5.4 deals with the question as to whether a director can appoint someone else to attend a board meeting on his behalf. The first line needs to be tailored to whatever is agreed between the shareholders. 6. Meetings This clause sets out the procedure for meetings, the quorum (i.e. the number of directors who must be present in order for the meeting to take place), frequency of meetings, and the usual place at which board meetings will be held. There are three possible alternatives shown in clause 6.1. Clause 6.4 gives each director one vote at a meeting and deals with the question as to whether, if there is a split vote, the chairman has an extra or casting vote. This may depend upon how the various shareholdings as structured. If, for example, the chairman has the largest shareholding in the Company, he may want to have an element of control which a casting vote gives him. Clause 6.5 deals with voting at board meetings. In our draft, unless otherwise agreed, a majority of the directors present at the meeting will have the power to pass the board resolutions. In some cases where there is one major shareholder, that individual may require the Shareholders Agreement to specify that no resolutions of the board or of the shareholders can be passed without his/her vote being included in the majority of those voting in favour of the resolution. Clause 6.6 allows for resolutions to be passed without a meeting and 6.7 requires the minutes to be prepared and circulated for approval. The company secretary will normally keep the minutes and the company secretary may also be a director. 7. Conduct of the business of the Company This clause will need to be tailored depending upon the particular terms agreed between the shareholders. Clause 7.1 establishes where the head office will be and if this is in a building provided by one of the shareholders, appropriate wording should be incorporated. Depending on the situation, it may be sensible to have a formal lease between the company and a shareholder who provides premises from which the company can carry on business. Clause 7.2 contemplates that an individual will be appointed to run the company on a day to day basis. That individual is likely to be a director but not necessarily. Clause 7.3 sets out in general terms the authority of the managing director or general manager. 8. Bank Accounts This clause specifies the name of the Bank at which the company will open an account and the authority of directors to sign cheques etc. 9. Auditors and Accounting Information Not every company needs to have auditors – accountants are required but the role of auditors is more onerous and can be avoided in the case of a small company. If auditors are not to be appointed, alter the references to 'auditors' to 'accountants'. If accountants/auditors have been selected, the name of the appropriate firm should be inserted in 9.1. Clause 9.2 and 9.3 contained a requirement for proper accounting records and, in 9.3, monthly management accounts. Clause 9.4 specifies the Accounting Reference Date – i.e. the date to which the annual accounts will be prepared. This is a statutory requirement and the Accounting Reference Date has to be filed at Companies House. Clause 9.5 makes it clear that shareholders have access to the company's books. 10. Matters requiring the consent of all shareholders This clause affects board meetings as well as meetings of the shareholders and sets out those key decisions which requires the consent of all the shareholders. Alternatively the opening words could make it clear that a special majority – e.g. three out of four shareholders or at least 75% of the votes of shareholders – is required for these matters. The list of items may need to be adjusted depending on the nature of the business. Our list is intended to cover many of the important decisions which the company is likely to make.
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