A shareholders agreement can set-out the agreed scope of the business that the company can carry-on, and define the geographical area in which the company can operate. For example, the business may be confined to the sale of electrical goods online to customers located in the United Kingdom. Any departure from this defined scope and area of operation may require the consent of all shareholders.

The shareholders may decide that a business plan should be prepared each year for the approval of the directors/shareholders. The agreement can require this plan to be prepared and dictate its contents, including financial forecasts, budgets and accounting information.

Shareholders of smaller companies are normally actively involved in the day-to-day running of their company. It is therefore usual (but by no means necessary) for these shareholders to also be directors of the company.

When a company is formed the shareholders will carefully select appropriate persons to be directors of the company – this may be a case of simply deciding that all of the shareholders will also be directors. These directors are appointed at the same time as the company is formed.

So far so good, but there is more to think about here. The default position is that directors can be removed from office by shareholders holding the majority (51%+) of the shares in the company. That means that a director’s position is not secure unless they have the continued support of a shareholder or shareholders who hold the majority of the shares in the company. A majority shareholder (or a number of shareholders who club together to make a majority) can remove directors on a whim.

A shareholders agreement can change the default position so that directors can only be appointed or removed with the consent of all of the shareholders. This means that no shareholder can be removed from the position of director without their consent.

What about future directors of the company? A shareholders agreement can specify whether there can be any additional directors of the company and whether the appointment of these directors requires the consent of all shareholders.

In addition, where the directors of the company are not the same persons as its shareholders a shareholders agreement can ensure that no director is appointed or removed without the consent of all shareholders.

Another key issue in relation to shareholders who are directors is the amount of time that they agree to devote to the company. What happens if a director agrees to devote 100% of their working time to the company when the company is formed, but subsequently only works a couple of days a week?

A shareholders agreement can work in conjunction with a well-drafted employment contract to oblige each shareholder who is a director to devote an agreed amount of time to the company. The agreement can also oblige the shareholders to promote and develop the business of the company. An obligation that non-director shareholders do not otherwise have.