Shareholders’ Agreements: Why Every Business Needs One

A shareholders’ agreement is a private contract between the shareholders of a company that sets out their rights and obligations in relation to each other and to the company. Unlike the Articles of Association — which are filed at Companies House and publicly available — a shareholders’ agreement is confidential. It sits alongside the Articles and fills gaps that the statutory framework does not address.

What does a shareholders’ agreement cover?

A well-drafted agreement covers how decisions are made — which matters require unanimous consent, which require a majority, and what counts as a majority. It records what each shareholder contributes to the business in terms of capital, skills, and time, and what they receive in return. It sets out what happens when a shareholder wants to leave — whether others must be offered first refusal — and what happens if a shareholder dies, becomes incapacitated, or is convicted of an offence.

Reserved matters

Reserved matters are decisions that require the consent of all shareholders or a specified majority, regardless of their shareholding. Common reserved matters include issuing new shares, taking on significant debt, acquiring or disposing of major assets, changing the nature of the business, approving the annual budget, and appointing or removing directors. Without reserved matters, a majority shareholder can act unilaterally on many significant decisions.

Share transfer restrictions

A shareholders’ agreement typically restricts the free transfer of shares. Pre-emption rights require a selling shareholder to offer their shares to existing shareholders before offering them to an outside party. Drag-along rights allow a majority to force minority shareholders to sell on the same terms when the company is being sold. Tag-along rights allow minority shareholders to join in any sale by a majority, on the same terms.

Deadlock provisions

Deadlock occurs when shareholders are equally split and cannot agree on a decision. Without a mechanism for resolving deadlock, the company can become paralysed. Deadlock provisions typically include a cooling-off period, escalation to senior management, mediation, a Russian roulette clause — where one shareholder offers to buy out the other at a stated price, and the other must sell or buy at that price — or a shoot-out clause.

What if there is no shareholders’ agreement?

Without an agreement, disputes are governed by the Companies Act 2006, the Articles, and general company law — which is ill-suited to the dynamics of a small business with a handful of shareholders who work together closely. Disputes that might have been resolved by a clear agreement instead result in expensive litigation or the breakdown of the business entirely. The cost of a shareholders’ agreement is a small fraction of the cost of the disputes it prevents.