What is a Shareholders’ Agreement?

It is probably best to answer this question in a somewhat tedious and didactic fashion. A company is a separate legal entity from an individual; it is a legal person. Companies are quite special, so they have a series of laws pertaining to them. In the UK, these laws are the various Company Acts and case law.

The man on the street will make decisions. Those decisions will be made by some internal reference point based presumably on the summation at that particular moment of that person’s education and empirical experience. In the same way, companies need a reference point to govern their internal affairs and decision making process. This is the constitution. In the UK, it is known as the Memorandum of Association and Articles of Association; in other jurisdictions, they are known as the Articles of Association and by-laws.

Companies are often set up very quickly and cheaply. You may have heard the expressions “off the shelf company” or “shelf company”. This is because that is exactly what they are: you go to the “shop” and buy a company with a standard constitution. The constitution will reflect the minimum requirements of the law but will not be specifically tailored to the owners’ needs. The constitution in most jurisdictions is a matter of public record.

So, it is now possible to answer the question. Very simply, a Shareholders’ Agreement is a private contractual agreement between the owners of a company. It supplements the company’s constitution. It smooths the edges. It ought to be specifically tailored to the company owners’ needs and requirements. It is arguably very necessary.

The next articles will consider what ought to go into a shareholders’ agreement and why. They will also discuss when things go wrong. Just like people, shareholders agreements can be good and bad.