Getting your Shareholders Agreement Right!

Disputes between shareholders can be very disruptive as has been demonstrated recently in the well-publicised Superdry example.

In an effort to reinvigorate the company after poor sales figures and a subsequent dive in share value, Mr Dunkerton, a co-founder of the Superdry brand and shareholder of the company, asked shareholders to appoint him to the board.  He won the vote by a narrow margin but several members of the board of Superdry, including the chief executive, resigned as a result of Mr Dunkerton’s appointment.

Companies of any size may encounter situations where shareholders and directors disagree.  It is also not unusual for directors to have substantial shareholdings in the companies that they manage.  Disputes may arise over the direction of the company, strategic direction, and appointment of directors to the board and disputes over the terms of directors’ contracts or dividend policy.

It is advisable for shareholders of a company to consider the possibility of such disputes and agree beforehand how they can be resolved in an amicable manner.  The key documents that govern the relationship between companies, their directors and shareholders are the company’s articles of association and a shareholders agreement.

Articles of Association

A company’s articles are a requirement for its incorporation. The articles of association set out the rules of how the company is governed, in particular the powers of the directors, voting rights and dividend procedure.

A large number of new companies use “Model Articles” which are the template articles of association contained in the Companies Act 2006. However, these may not always be appropriate and it is possible to amend these articles or even draw up entirely bespoke articles for the new company. If you foresee potential issues in how the company is run, especially the general power of directors, the owners of a new company can anticipate this with tailored articles.

For example, the articles could raise the shareholder voting requirements for certain decisions or give certain shareholders additional weight in any votes. However, if these provisions are something which you do not wish to be public knowledge, it is not advisable to put them into the Articles as they are publicly available on Companies House.

Shareholders Agreement

In contrast, a shareholders agreement can be entirely private between its signatories. A shareholders agreement can include many different types of terms which would give or restrict certain actions of the relevant parties.

For example, a shareholders agreement may give shareholders a greater say in certain decisions, like appointing new directors, taking on debt or paying dividends. The provision could ask for a simple majority or even a unanimous approval of such decisions by the directors. These provisions may impact the day to day running of the company, but undoubtedly give shareholders a louder voice in the boardroom and, particularly, at shareholder meetings.

If there is a deadlock between the directors and shareholders, then the shareholders may be given a right to purchase the other shareholders’ shares (or sell their own) to allow the company to move on. Alternatively, a provision may allow for the company to be wound up if the deadlock cannot be resolved.

Summary

Whilst it may not always be possible for directors and shareholders to agree, adequate provision for an amicable resolution of disputes in a company’s articles and a shareholders agreement may help to avoid acrimony.

Eoin Longworth