If a private limited company has more than one shareholder, it is always recommended that the agreed terms, governing how the shares of the company are held and the relationship between the shareholders and the company, are put into writing.

The end result is that a “shareholders agreement” is formed, a term that may be familiar if you have read any of the popular “do’s and don’ts for start-ups” blogs. The provisions of the shareholders agreement dovetail with the company’s articles of association, but the difference is that the shareholders agreement is a private document, whereas the articles of association are displayed on Companies House for all to see.

Affording and/or limiting shareholder rights

It is easy to afford any right that you may wish to, to any “class” of shareholder – all you need is to insert a provision to the desired effect within the shareholders agreement. The same applies when looking to restrict the rights of any “class” of shareholder.

The class of a shareholder is determined by the “class” or type of shares that the shareholder holds. A company is typically incorporated with ordinary £1 shares, but it does not have to be. A company can incorporate, or subsequently create and allot (i.e. distribute to its shareholders) as many types of shares as it sees fit.

The following are the most common types of shares:

• Ordinary £1 shares – holders of such shares normally have 1 vote per share to cast at shareholders’ meetings and are afforded a dividend from the company’s profits, if the company can afford to lawfully pay one;
• Ordinary £0.01 shares – holders typically have similar rights to those holding ordinary £1 shares, but the nominal value is 1p, rather than £1;
• Preference shares – holders benefit from certain rights, for example, to a fixed annual dividend in advance of holders of other classes of shares; and
• Ordinary B shares – holders have certain rights or restrictions, for example restricted voting rights but entitlement to dividents, or indeed vice versa.

When to put a shareholders agreement in place

As stated above, the need for a shareholders agreement will depend on the number of shareholders a company has. As soon as this number is greater than one, putting a shareholders agreement in place is recommended.

Shareholders agreements are often only looked upon as “needed” when disputes arise, by which point it is too late if there is no written agreement to fall back on. To this end, if you think that there is currently no need to put a shareholders agreement in place, then it is likely this is exactly the right time to get one. Not only will it stand each shareholder in good stead for a number of reasons, but if the shareholders are enjoying a harmonious relationship then the process should be a relatively quick and easy one.

Reviewing shareholders agreements

A shareholders agreement may have been put in place at a time when the company was generating little profit but if it has grown it may wish to provide certain benefits to its shareholders, such as a right to a fixed annual dividend, etc.

Therefore, the extent to which reviews of shareholders agreements are necessary depends on the extent of change to the business of the company. Good legal advice can help you determine your requirements.