What is a Shareholders' Agreement?

For an overview of different business types in the UK, see Business Structures.

A shareholders’ agreement is a private contract between some or all of the shareholders of a company. It sets out the rights and obligations of the shareholders, regulates how the company is managed and provides mechanisms for dealing with disputes, share transfers and exit scenarios.

Unlike the articles of association, a shareholders’ agreement is not filed at Companies House and is not publicly available. This makes it the preferred vehicle for commercially sensitive governance arrangements.

Why Have a Shareholders’ Agreement?

While the articles of association provide the basic constitutional framework for a company, they have limitations:

• Articles are publicly available on the Companies House register
• Articles bind all shareholders, including future ones who had no say in their drafting
• Articles can be amended by a 75% special resolution, meaning a majority shareholder can change them without minority consent
• Articles do not easily accommodate personal obligations on shareholders (such as non-compete clauses)

A shareholders’ agreement fills these gaps. It is a confidential document that can only be amended with the unanimous consent of all parties (unless the agreement provides otherwise). This gives minority shareholders significantly greater protection than the articles alone.

Key Clauses in a Shareholders’ Agreement

Reserved Matters

Reserved matters are decisions that require the consent of all shareholders (or a specified majority), rather than being left to the directors or a simple shareholder majority. Common reserved matters include:

• Issuing new shares or changing the share capital
• Taking on significant debt or giving security over company assets
• Entering into contracts above a specified value
• Changing the company’s business or objects
• Appointing or removing directors
• Approving the annual budget
• Making distributions or declaring dividends
• Selling all or substantially all of the company’s assets
• Entering into related-party transactions

The list of reserved matters is one of the most negotiated parts of any shareholders’ agreement, as it determines the balance of power between majority and minority shareholders.

Pre-emption Rights on Share Transfers

Pre-emption rights give existing shareholders the right of first refusal when another shareholder wants to sell their shares:

1. The selling shareholder notifies the company and other shareholders of their intention to sell
2. The other shareholders have a specified period (typically 28-60 days) to offer to buy the shares
3. If the other shareholders do not take up their rights, the selling shareholder can sell to a third party on terms no more favourable than those offered to the existing shareholders
4. The offer to the third party must usually be completed within a further specified period

Pre-emption rights protect shareholders from finding themselves in business with unwanted partners.

Tag-Along Rights

Tag-along rights (also called co-sale rights) protect minority shareholders when a majority shareholder sells their shares. If a majority shareholder receives an offer to buy their shares, the minority shareholders have the right to sell their shares on the same terms.

This ensures minority shareholders are not left behind in a company controlled by a new majority owner they did not choose.

Drag-Along Rights

Drag-along rights protect majority shareholders by allowing them to force minority shareholders to sell their shares on the same terms if the majority shareholder has agreed a sale of the entire company.

This prevents minority shareholders from blocking a trade sale that the majority supports. Drag-along rights typically require that:

• The sale price exceeds a minimum threshold
• The sale is on arm’s length terms
• The minority shareholders receive the same price per share as the majority

Deadlock Resolution

Deadlock occurs when shareholders with equal voting power cannot agree on a significant decision. The shareholders’ agreement should include mechanisms for resolving deadlock, such as:

• Escalation to senior representatives of each party
• Mediation by an independent third party
• Expert determination for financial or valuation disputes
• Russian roulette — one party offers to buy the other’s shares at a stated price, and the other must either accept or buy the first party’s shares at the same price
• Texas shoot-out — both parties submit sealed bids, and the highest bidder buys the other’s shares
• Winding up the company as a last resort

Non-Compete and Restrictive Covenants

Shareholders’ agreements frequently include restrictions preventing shareholders from:

• Competing with the company during their shareholding and for a period after exit
• Soliciting the company’s customers, clients or suppliers
• Poaching the company’s employees
• Using confidential information belonging to the company

These restrictions must be reasonable in scope, duration and geographical area to be enforceable under English law. Overly broad restrictions may be struck down by the courts.

Dividend Policy

The agreement may set out the company’s dividend policy, including:

• A commitment to distribute a minimum percentage of profits as dividends
• The timing of dividend payments (quarterly, annually)
• Any restrictions on dividends (for example, maintaining minimum cash reserves)
• How dividends relate to different share classes

Good Leaver and Bad Leaver Provisions

These provisions apply when a shareholder who is also a director or employee leaves the company:

Good leaver/bad leaver provisions protect the company from a departing shareholder retaining valuable equity while no longer contributing to the business.

Board Composition and Director Appointment

The agreement may specify:

• How many directors each shareholder can appoint to the board
• Requirements for a chairperson and whether they have a casting vote
• Observer rights for shareholders who cannot appoint a director
• Quorum requirements for board meetings
• The frequency and conduct of board meetings

Information Rights

Shareholders may negotiate rights to receive:

• Monthly or quarterly management accounts
• Annual budgets and business plans
• Access to the company’s books and records
• Notice of material events (litigation, key contracts, regulatory issues)

These rights go beyond the statutory rights of shareholders to receive the annual company accounts.

Shareholders’ Agreement vs. Articles of Association

What Happens If They Conflict?

If the shareholders’ agreement and articles conflict, the shareholders’ agreement generally prevails between the parties who signed it. However:

• The articles continue to govern the company’s relationship with non-parties
• A court may find it difficult to enforce the shareholders’ agreement if it contradicts mandatory provisions of the Companies Act 2006
• Best practice is to ensure the articles and shareholders’ agreement are consistent and to include a provision stating which document takes priority in case of conflict

When Do You Need a Shareholders’ Agreement?

A shareholders’ agreement is advisable whenever:

• There are multiple shareholders, especially with different levels of investment or involvement
• Minority shareholders need protection against majority control
• Shareholders are also directors or employees and good leaver/bad leaver provisions are needed
• The company is seeking investment from external investors (most investors will require a shareholders’ agreement)
• Shareholders want to include confidential commercial terms that should not be on the public register
• There is a risk of deadlock between shareholders with equal voting power

Even in a company with a sole shareholder, a shareholders’ agreement may become necessary when new shareholders are introduced through investment, share option schemes or bringing in a business partner.

Deed of Adherence

When a new shareholder joins the company (for example, through a share transfer or new share issue), they typically sign a deed of adherence confirming that they are bound by the existing shareholders’ agreement. This ensures that the protections in the agreement extend to the relationship with the new shareholder.

Related Concepts

• Articles of association — the public constitutional document that complements the shareholders’ agreement
• Director duties — obligations that directors owe regardless of the shareholders’ agreement
• Companies House — the shareholders’ agreement is not filed here, unlike the articles
• Private limited company — the most common entity type using shareholders’ agreements
• Memorandum of association — the formation document signed by the initial subscribers