A shareholders’ agreement is one of the most important legal contracts a company can have. Whether you’re a startup founder, investor, or long-term shareholder, understanding how it works can protect your interests, help you avoid disputes, and clarify the expectations between all parties.
In this guide, we’ll break down the essential elements of a shareholders agreement, its interaction with articles of association, how it can help resolve disputes, and answer some frequently asked questions.
What is a shareholders’ agreement?
A shareholders’ agreement is a private, legally binding contract between the shareholders of a company. It outlines the rights and obligations of each shareholder and provides a clear framework for how the company should be managed.
Unlike your company’s articles of association, which are public and filed with Companies House, a shareholders agreement is confidential. It also gives you more flexibility and control over how the business is run, helping to prevent disputes and safeguard shareholder interests.
What happens if there is no shareholders’ agreement?
If your company doesn’t have a shareholder agreement, your rights and responsibilities will be governed by a combination of two things:
- The company’s articles of association: Filed at Companies House and binding under the Companies Act 2006, these set out rules on things like voting, director appointments, and share transfers.
- The Companies Act 2006: This is the primary legislation governing company law in the UK. It includes rules on directors’ duties, shareholders’ rights, and company procedures.
While these frameworks provide a basic legal structure, they do not reflect the bespoke commercial arrangements between shareholders. For example, they won’t cover founder responsibilities, minority protections, exit strategies, or dividend expectations, all of which can be dealt with in a well-drafted shareholders’ agreement.
Types of shareholders’ agreements
There’s no one-size-fits-all template when it comes to a shareholder agreement. They should always reflect the company’s structure, goals and the personalities involved.
Here are some of the most common types:
- Founders’ agreements: Used in early-stage businesses to outline the responsibilities and commitments of each founder, particularly where equity and decision-making powers are split.
- Joint venture agreements: Applicable where two or more businesses create a new entity together. This type of agreement is crucial for aligning the strategic goals of different parent companies and ensuring clear governance from day one.
- Investor agreements: Usually put in place alongside or as part of investment term sheets. They’re critical in venture capital and angel investment scenarios.
- Family business agreements: These agreements govern the generational transfer of ownership and voting rights, helping to avoid conflict within family-run companies. The goal is to strike a balance between family dynamics and sound corporate governance.
- Minority protection agreements: These offer much-needed reassurance to smaller shareholders who might otherwise lack influence and are often critical in encouraging early-stage investment.
Can a company have more than one type of shareholders’ agreement?
- Tailored clauses within one agreement: For example, investors may have veto rights or dividend preferences that don’t apply to other shareholders.
- Separate schedules or annexes: Allowing bespoke terms to apply to different share classes or shareholder groups.
- Side letters: These are occasionally used (especially in investment rounds) to provide additional rights to specific shareholders without affecting the main agreement. These must be carefully drafted to ensure they do not contradict the main agreement or articles and may be unenforceable if they attempt to vary statutory company obligations.
Who signs the shareholders’ agreement?
Ideally, all shareholders in the company should be party to the shareholders’ agreement. New shareholders can be added to the agreement via a deed of adherence, a legal document that binds the new party to the terms of the existing agreement.
It’s good practice to:
- Ensure every shareholder signs the agreement when they acquire shares
- Require new shareholders to sign a deed of adherence as a condition of being issued shares
- Keep a signed and dated copy of the agreement with your company records.
What happens if a shareholder does not sign the agreement?
- Unequal treatment: Shareholders who are not party to the agreement may not be subject to restrictions (e.g. on share transfers or confidentiality), which could undermine the agreement’s effectiveness.
- Dispute risk: If a dispute arises, the company cannot rely on the shareholders’ agreement to enforce obligations against non-signing shareholders.
- Enforceability issues: Important protections (e.g. drag-along/tag-along rights, voting thresholds and dividend policies) may not be enforceable against all shareholders.
Benefits of a shareholders’ agreement
Putting a shareholders’ agreement in place isn’t just about risk mitigation. It also brings proactive benefits to your business, including:
- Reduced risk of disputes: By agreeing on roles, rights and obligations from the outset, you minimise the risk of future disagreements.
- Confidentiality: Unlike articles of association, your shareholders’ agreement is a private document, meaning commercial or sensitive provisions remain confidential.
- Enhanced decision-making: You can define how decisions are made, what matters require shareholder approval, and set thresholds for major business actions.
- Succession and exit support: A shareholders’ agreement can include procedures for share transfers, exits and inheritance planning, ensuring a smooth transition if someone leaves.
- Minority shareholder protection: Minority protections ensure those with smaller stakes still influence key decisions and aren’t overruled unfairly.
- Attract investment: Investors are more likely to engage with businesses that have a structured governance approach and clear dispute procedures.
What to include in a shareholders’ agreement
- Share ownership and share classes: Details on who owns what, the rights attached to each class, and how new shares can be issued.
- Share transfers: Rules around voluntary and involuntary transfers, including pre-emption rights, valuation methods and lock-in periods.
- Decision-making and reserved matters: Defines how day-to-day and strategic decisions are made. Identifies issues that require unanimous or super-majority approval.
- Board structure: Specifies who sits on the board, how directors are appointed and removed, and how board meetings function.
- Dividend policy: Sets expectations around when and how profits will be distributed.
- Exit provisions: Covers scenarios including sales, initial public offerings (IPOs), or shareholder death.
- Dispute resolution: Details steps to take when conflicts arise, including escalation to mediation, litigation or arbitration.
- Change of control provisions: Defines how the agreement operates if a majority shareholder sells their stake or there is a takeover.
- Drag-along and tag-along rights: Protects majority and minority shareholders during company sales.
- Non-compete and confidentiality: Limits post-exit competition and the misuse of sensitive company information.
- Funding and capital contribution: Sets out any commitments shareholders make regarding initial or future capital. Clarifies expectations around loans vs equity and define what happens if funding milestones aren’t met.
- Intellectual property and ownership: This clause is especially important for tech companies and startups. It should define who owns any IP created and what happens if a shareholder leaves with valuable knowledge or assets.
- Insurance and key person cover: Specifies if the company will take out life insurance or key person insurance to protect against the death or incapacity of a shareholder or director.
Can a shareholder agreement be amended?
A shareholders’ agreement can be amended, but it usually requires the consent of all parties to the contract or a specific majority if the agreement allows for it.
Amendments should always be made in writing and signed by the relevant parties to ensure they are legally binding. If the company’s structure or shareholder base changes (such as during an investment round or exit), it’s essential to review and update the agreement to reflect the new arrangements and avoid future disputes.
How to protect minority shareholders in a shareholders’ agreement
- Veto rights: Also known as reserved matters, these give minority shareholders the power to block key decisions (e.g. changing the business structure, issuing new shares, taking on significant debt, etc.) that could disproportionately affect them.
- Enhanced information rights: Minority shareholders may not sit on the board, so the agreement can entitle them to receive regular management reports, financial statements, and updates to stay informed and engaged.
- Pre-emption rights: These give minority shareholders the first opportunity to buy new shares before they are offered to others, helping prevent dilution of their stake.
- Tag-along rights: If a majority shareholder sells their shares to a third party, tag-along provisions ensure minority shareholders can sell their shares on the same terms, avoiding being left behind under new ownership.
- Dividend rights: The agreement can provide for fair and proportionate distribution of dividends, or prioritise certain payments to protect minority financial interests.
- Deadlock resolution mechanisms: In companies where voting rights are split evenly, specific procedures can help prevent or resolve decision-making stalemates that leave minority shareholders at a disadvantage.
- Non-compete protections: Ensuring that other shareholders can’t set up rival businesses helps protect the overall value of minority shareholdings.
Shareholder disputes and the role of the agreement
Disputes between shareholders can be damaging, expensive and time-consuming. Common causes include disagreements over the direction of the business, unequal contribution of effort or capital, conflicts of interest, and personal breakdowns in relationships.
Ultimately, a shareholders’ agreement ensures that disputes can be handled systematically, without descending into protracted legal battles.
Here’s how it does that:
Clarity of roles and expectations
By defining the roles and responsibilities of each shareholder, the agreement reduces the chance of misunderstandings or duplicated efforts.
Deadlock resolution mechanisms
Many agreements include specific procedures for resolving deadlock, such as:
- Mediation followed by arbitration
- Chairperson’s casting vote
- Buy-sell clauses or Russian roulette clauses.
These tools help avoid a situation where the business becomes paralysed due to inaction or disagreement.
JARGON BUSTERA Russian roulette clause is a deadlock-breaking mechanism ensuring fairness in business exits. One shareholder offers to buy the other’s shares at a set price. The recipient must either sell their shares or reverse the offer, buying the initiator’s shares at the same price. This encourages the initiator to propose a fair valuation, as they could end up on either side of the deal.
Set procedures for exits
Shareholder disputes often arise when one party wants to leave and sell their shares. A well-drafted agreement will define the exit process, including valuation, transfer restrictions, and the rights of remaining shareholders.
Remedies and enforcement
The agreement can include provisions for damages, forced transfers, or other penalties if a shareholder breaches their obligations, helping enforce accountability.
How to draft a legally binding shareholder agreement
Creating a legally binding agreement involves more than just documenting ideas. It should be:
- Written in plain English
- Tailored to the specific business and shareholding structure
- Reviewed and negotiated with all parties.
Step 1: Clarify the purpose of the shareholders’ agreement
Understand why you are drafting the agreement and what risks you want to mitigate. Consider who the key parties are and what needs protecting.
Step 2: Involve all relevant parties
This isn’t a document to impose unilaterally. Consult with all shareholders to ensure their buy-in and prevent future resistance.
Step 3: Get legal advice
You should always involve a solicitor to ensure your agreement is legally valid, tailored to your business, and free of ambiguity.
Step 4: Review your articles of association
The shareholders’ agreement and articles should complement each other. Your solicitor can advise whether amendments to the articles need to align with the agreement.
Step 5: Sign and store the agreement
All parties should sign the agreement. Make sure you store it securely, and that all new shareholders are required to sign a deed of adherence.
Step 6: Register related provisions where necessary
Although the shareholders’ agreement is private, some related provisions (e.g. share transfers or directorship changes) may require updating Companies House filings. Always consult a solicitor on any regulatory implications.
Why use a solicitor to draft a shareholder agreement?
Drafting a shareholders’ agreement is a strategic safeguard that supports long-term business health. While templates may seem convenient, they often overlook your business’s specific legal and commercial nuances.
On the other hand, investing in expert legal support ensures your shareholders’ agreement is a true asset to your business – providing security, clarity and flexibility at every stage of its growth.
Working with a solicitor offers several clear advantages:
- Tailored advice: A solicitor will ensure the agreement is aligned with your business model, growth plans, and shareholder dynamics, rather than relying on generic assumptions.
- Clarity and enforceability: Lawyers draft in precise legal language, helping to avoid ambiguity and making sure the agreement stands up in court if tested.
- Risk management: Solicitors are trained to anticipate potential problems, from shareholder exits to voting deadlocks, and can include clauses that protect the business.
- Alignment with other documents: Your articles of association and investment agreements must work seamlessly with the shareholders’ agreement. A solicitor ensures they’re not in conflict.
- Efficient dispute prevention: Proper legal drafting helps minimise the chance of future fallouts and can save substantial time, cost and disruption.
What are reserved matters in a shareholders’ agreement?
Reserved matters are key business decisions that cannot be made by directors alone and require shareholder approval, often by a super-majority or unanimous consent, depending on what the shareholders’ agreement stipulates.
The purpose of reserved matters is to give shareholders, predominantly minority shareholders, a say in the company’s strategic direction and to act as a safeguard against unilateral decision-making by the board or majority shareholders.
Examples of common reserved matters include:
- Issuing or transferring shares
- Amending the articles of association
- Changing the company’s business activities
- Entering into major contracts or loans
- Declaring dividends
- Appointing or removing directors
- Selling a significant part of the business
- Winding up the company.
The specific list of reserved matters should be tailored to the business and its risk profile. These provisions help maintain checks and balances within the company. They are particularly important in businesses where not all shareholders are on the board or involved in day-to-day management.
What are articles of association?
The articles of association are a public document that forms part of your company’s constitution. Binding under section 33 of the Companies Act 2006, they regulate the relationship between the company and its shareholders, and the company must operate in accordance with them.
The Companies Act 2006 sets out default articles for companies (the Model Articles), but most businesses benefit from tailoring these. Articles of association can include customised clauses if amended during company formation or via special resolution.
Common customisations include:
- Different classes of shares (e.g. voting vs non-voting)
- Procedures for calling meetings
- Rights attached to shares.
Articles of association and shareholders’ agreements
When creating a shareholders’ agreement, it must be consistent with the articles, as inconsistencies can lead to confusion or commercial disputes.
If a conflict arises, the court will usually treat the shareholders’ agreement as a personal contract and the articles as legally binding rules for how the company must act.
That means:
- The shareholders’ agreement may still be enforceable between the parties involved (e.g. one shareholder may sue another for breach of contract)
- However, the court will not enforce actions that are contrary to the articles when it comes to the company’s governance (e.g. who the board can validly appoint).
To avoid a conflict, it’s essential to review both documents together and, where necessary, update the articles to align with the provisions of the shareholders’ agreement.
Shareholders agreement vs partnership agreement
- A shareholders’ agreement is used in limited companies and governs the relationship between shareholders and the company.
- A partnership agreement applies to unincorporated partnerships and outlines how the partners will operate and share profits.
FAQs about shareholders’ agreements
Generally, no. Shareholders can only be removed by mechanisms set out in the shareholders’ agreement or articles, such as forced transfers following misconduct or deadlock.
You should include details of the claim, the legal basis, the remedy sought, supporting documents, and a deadline for response. See the relevant section above for fIt can in many private matters, but not all. The articles still govern the company’s statutory obligations and procedures.
It’s best practice. If someone doesn’t sign, they aren’t bound by it. To avoid this, companies should make it a condition of acquiring shares that each new shareholder signs the agreement or a deed of adherence.
Yes, provided it is properly drafted and executed, it can be enforced in the courts.
Ordinary resolutions require a simple majority of shareholder votes, while special resolutions typically require 75% approval. Reserved matters in the agreement may specify which threshold applies to certain decisions.
Not necessarily. You can use different share classes to separate voting rights, dividend rights, and exit provisions. A shareholders agreement can balance incentives for employee shareholders without compromising investor control.
Review it annually or whenever there is a significant change, e.g. a new shareholder joins, funding is raised, or the company enters a new stage of growth.
Contact our shareholder agreement solicitors today
- Expert shareholder advice: Helping you not mitigate legal risks and create a roadmap for long-term collaboration, governance, and value creation.
- Tailored support: No two businesses are the same. We provide practical, sector-specific advice for founders, investors, family businesses and growing SMEs.
- Cost transparency: We offer clear, fixed-fee pricing wherever possible, with no hidden surprises.
- Commercially focused advice: We combine legal expertise with a strong understanding of business realities to deliver agreements that work in practice, not just on paper.