Shareholders Agreement (Protection of a Minority Shareholder)

What is a shareholders agreement (protection of a minority shareholder) and when should you use it?

A Shareholders’ Agreement is a legally binding contract between the shareholders of a company.

It governs the relationship between the shareholders in order to protect the interests of the individual shareholders as and against each other.

A Shareholders‘ Agreement is of crucial importance in any company where there is more than one shareholder.

It provides a level of protection for the shareholders involved in the company and establish a fair relationship between them.

This Shareholders’ Agreement – Protection of a Minority Shareholder template is specifically drafted for companies where there are two shareholders – one majority shareholder and one minority shareholder.

This Agreement is designed to protect the interests of the Minority Shareholder (i.e. the person with less than 50% of the issued share capital in the company) against the majority shareholder using its voting power to the detriment of the minority shareholder.

It contains specific clauses for the protection of the Minority Shareholder.

Without such an agreement, a company is under the control of those who hold a majority of the votes at a directors’ or shareholders’ meeting.

Unless constrained by a Shareholders’ Agreement, shareholders with a simple majority of votes have very wide powers under Company Law.

This Shareholders’ Agreement constrains these powers so that certain actions can only be taken with the consent of all the parties.

It sets-out the rights and obligations of the shareholders, regulates the appointment of directors, as well as how decisions are made by the directors.

Please note that under Company law being a shareholder does not confer the right to be a director so a provision in this regard has been included in this Shareholders’ Agreement.

This comprehensive Shareholders’ Agreement also includes clauses dealing with the transfer of shares in the company, pre-emption rights on a transfer of shares where any party to the shareholder agreement who subsequently wishes to sell their shares must first offer the shares to the other shareholders, and it also includes Drag-Along and Tag-Along Clauses. 

Finally, a Confidentiality Clause and a Non-Compete, Non-Solicitation and Non-Poaching Clause have also been included in the agreement to safeguard the interests of the company.

You can read our guide to shareholders agreements here

We’ve also got a useful checklist to help you when drafting your shareholders agreement.

Once you’ve got a signed shareholder agreement in place, then, when you’re bringing on board further shareholders (provided that you’re doing so on the same terms) they will not need to sign the shareholder agreement itself.

Instead, they can simply sign a deed of adherence to it, which is a simpler document but that binds them, and you, to the same terms as the original shareholder agreement.

You can use our deed of adherence for these purposes.

It is important that when drafting your shareholders agreement you also consider it in conjunction with a director’s service agreement or contract of employment.

This gives both the company and the shareholders further safeguards.

You can find our director’s service agreement here

Updated 10 March 2023