What is meant by shareholders agreement, its utilisation and benefits after starting a company UK?

10 Jan

Generally, at the instant of starting a company UK, there are two documents that need to be prepared at the time of company incorporation. These documents include memorandum and the articles of association. The future members of a company sign the memorandum before they open new company UK. These two documents should be submitted to the companies’ registrar so that the company is legally and properly incorporated. Amongst these the memorandum of a company is deemed as a contractual binding of a different nature between the company and its members. But there may be agreements signed between the shareholders later after open a company in UK.

Shareholders Agreement

Generally, articles of association of a company or its constitution may be supported by a contract between the company and its members holding shares in that company when they open a company in UK. This agreement may be of a quite formal nature. The shareholders sign this agreement at the time of setting up a limited company UK or any time after the company starts operating. Company implement shareholders agreements in order to expand its business and offering additional shares to outsiders.

Effectivity of Constitutional Agreement

For the full enforcement of the constitution, it is mandatory that every member that is present in a company is taken as a party in the contract and hence, utilisation of the agreement of shareholders in this manner can be practically possible only when there are not too many members. Such agreements can be possible practically when signed between some persons holding membership of the same company but having different objectives and with different effectiveness. In past, the company used to be considered as a party sometimes, but this may be risky especially when there are chances of holding that the statutory authorities of the company have to be fettered. As in case of Russell v Northern etc.

Utilisation of Shareholders Agreement

The purpose for agreements of shareholders is to add-on the documents of constitution of small scale companies in countries like Canada and the U.S. Also the legislation of these countries’ jurisdictions, have acknowledged the significance of the shareholder agreements. The legislation of the United Kingdom does not recognise the shareholder agreements, however, as a standard, incorporating this agreement for some causes is being adopted. For instance, in cases like, joint ventures, securities relevant to in loan needed by lenders, as well as administrative buy-outs.

Typical Clauses of Shareholders Agreement

Typically, the agreements of shareholders involve provisions such as:

  • Every person holding shares in the company should be given the authority to make appointment of directors.
  • None of the shareholders should give their vote in favour of a modification in the articles of the company, or for changing the capital of the company if any of the members disagrees to it.
  • Also, a shareholder is authorised to make no repayment of the sum that he had once lent to his company, with exemption of few cases.

Benefit of Shareholders Agreement

The fundamental benefit of having a shareholders agreement is that, regular conditions apply on it, and not like the company’s articles, or the regulations for the administration of company’s capital, it cannot be subjected to any change by the vote of majority. Also, the restrictions of the contract apply as right by injunction. Comparatively, many of the solutions given by the laws of company are under discretion, and any member who is having few number of shares in any company, may not be given the status to make an application to the court regarding any complaint that he has. Additionally, the agreements, as regular contracts, are not subjected to the restrictions for administration of enforcing articles of the company by the members individually. Practically, the agreements of shareholders are more private in nature and are suitable for matters such as the remuneration for directors, policies on dividends and other issues concerning the administration of internal affairs, whereas on the other hand a company’s articles are publically available to its members for the purpose of investigation.  

Conclusively, according to the principles of contractual laws, the shareholders agreement can be circumvented in cases where any one party has signed a contract under the duress. For instance, consider the case of Antonio and the case of Borrelli v Ting that took place recently. In these case it was realised by the Privy Council that the liquidators had been forced to sign a contract for settlement with the shareholder at defense, as a consequence to the illegal duress of economy imposed by the defendant.

Disadvantages of Shareholders Agreement

Shareholder agreements may be disadvantageous as well. The fundamental flaw of shareholder agreements is that, following the regulations of contractual privity, an agreement of shareholders is a compulsion merely on its signatory parties, and not on those persons, who later get those shares via transfer and become the new members of the company. The Contracts Act 1999, regarding rights of third parties, is not likely to relate to this matter in context as it only concerns the rights and not restrictions. For its cure, the subsequent transferee parties are taken in the existing shareholders agreement by asking the new entrant for executing a ‘Deed of Adherence’.

Judges and the Shareholders Agreement

It is a practice of the judges for implication of the shareholders agreement and make it effective. For instance, the case of Pennell Securities. The conditions mentioned in shareholders’ agreement will be given importance in the proceedings that a minority shareholder brings in to get relief in consequence to an unjust and prejudiced conduct or for an order of liquidation of the company on the basis of justice and equity. However, in the case study of Sikorski, the court had held that violating any shareholders’ agreement as an inevitable consequence, would not contribute to unjust prejudice, yet it depends upon the petitioners for making the settlement that the interests of the petitioners have been unjustly prejudiced.

Examples of Shareholders Agreement

As an example of utilising the shareholders agreement, consider the case of Russell v Northern, Puddephatt, Euro Brokers, Punt v Symons in which it should be noticed that the agreement was signed with the company. However, the verdicts permit for inferring regarding the potentially varying treatment of the shareholders agreement.  Also consider, the case of Westcoast limited in which, the significance of precise and correct drafting was stressed by Rimer LJ. It was sought via the court by the claimant to get an order for the liquidation of the company for the loan of unpaid shares. However, this would normally be subjected to preclusion under article 5.3 of the shareholders’ agreement. But, it was mentioned by article 19 that the latest date of expiry of the agreement would be its 5th anniversary and as a consequence the claimant will be entitled to bring a petition against the agreement once it has expired. Even, then there was a condition upon the agreement that was a binding upon the shareholders to a limit and as long as necessary for making the rights and restrictions of the agreement effective. Hence, the appeal was turned on the impact of this vague condition. It was held by the Court of Appeal that the 19th article could bring the revival of article 5.3 more than 5 years’ period because on the whole, an intention consistently was depicted by the commercial arrangement of the parties that the company should be given a 5 years’ time for utilising the loans and establishing the venture of business and that, subsequently, it would be offered to the shareholders to get alternative to all the rights and solutions for the recovery of unsatisfied loans.

Alteration of Traditional Laws for Corporate via Shareholders Agreement

A shareholders agreement may possibly change the laws of corporate that were established conventionally and govern alteration of articles of association of a company and rules for enforcing the duties of the directors.

Consider the case of Wilkinson v West. The agreement of shareholders in the case of Wilkinson, included clauses stating that, it was possible to pursue some of the actions of the corporate when shareholders with a majority of more than 65% agreed for it, per 5th clause. Also, every shareholder is obliged to make use of appropriate and sensible possibilities for the promotion of company’s interests as specified by the 7th clause. It was held by Warren J that the 7th clause should be interpreted as a subject to 5th clause and that it was allowed to the shareholders in control who also held the directorship of the company, by the 5th clause, to make use of their vote for deciding that whether a company should strive for a new opportunity in business, following the consequence that later the opportunity would not be deemed as a corporate opportunity and hence, the directors pursuing that opportunity  would not be charged as violating the conflicts rule. In the case of Bhullar, a shareholder with shares in minority tried to seek a compensation under the unjust prejudice clauses but was unsuccessful. Also, refer to the case of Breckland Group.

A confirmation is given by the verdict that the shareholders who utilise their rights under the shareholders agreement, are allowed to use their votes as per their will. Following the principles of general contractual law, such a verdict is not at all astonishing. However, the case also gives an assurance that the directors who are also the shareholders in control, are allowed to bring modifications in the objects of business effectively, without being subjected to the restrictions as in cases like Allen v Gold. Also, they can make sure they do not come under the influence of fiducial conflicts rule in the pursuit of new opportunities of the corporate.

Exercising Authority conferred by the Statute

It is possible for a company not to restrict itself for not making use of any authority given to the company by the statute. However, an agreement signed by the company’s members that no support will be given by them to any such resolution will remain a restriction on the shareholders.

Consider the case of Russell v Northern. In 1979, a corporate body was established as the holding company of brick-manufacturing companies grouped together and having their base in North of Ireland. The company gave its shares to five parties. Amongst all the shares, 120 were held by the Respondent Bank, and 20 shares were held by of each of the 4 executives of the company. Russell was one of them. The company, namely TBL, completed its incorporation and immediately after that, there was a contractual arrangement made between the 5 shareholders of the company. There was a condition in the agreement which made it obligatory that no additional issuance or creation in the capital of the company would be made unless all the shareholders agreed to it. A proposal of increasing the capital up to 4 million Euros was presented by the board of directors in 1988 under a rights issue. However, the proposal was objected by Russell, who was also the shareholder in the company. He successfully, gained a declaration, that the shareholders were bound by the agreement, albeit the company was under no such obligation.

Hence, it can be seen from the above mentioned case studies that, the conditions of the shareholders agreement after open new company UK, are decided before the shareholders play a key role in later transactions of a company. So, these agreements plays a key factor for the authority of shareholders and should be designed as per the requirement of the company.

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