Understanding Shareholder Agreements

A shareholders' agreement records how a company's owners will make important decisions, fund the business and deal with departures or disagreements. For private companies in England and Wales, it works alongside the articles of association to put the owners' agreed arrangements in writing. Agreeing these terms early can reduce uncertainty and help prevent disputes.

What is a shareholders' agreement?

A shareholders' agreement is a private contract between some or all of a company's shareholders, and often the company itself. Many companies are incorporated using the standard model articles, which are written for companies generally rather than for any particular business. A shareholders' agreement allows the owners to record the arrangements they have actually made with each other.

Shareholders' agreement or articles of association?

Every company must have articles of association; a shareholders' agreement is optional. The two documents work together, but they differ in several respects.

The agreement and articles should be reviewed together and aligned where necessary. An agreement may state which terms take priority between its parties, but this does not automatically override the articles or mandatory company law. In practice, the articles are often amended at the same time so that the two documents are consistent.

What happens without an agreement?

Without a shareholders' agreement, the Companies Act 2006 and the company's articles provide the starting framework. The default rules may not reflect the owners' intentions. In particular:

• Ordinary decisions follow the majority. Shareholders holding more than 50% of the votes can pass ordinary resolutions. This includes a resolution to remove a director under section 168 of the Act, although removal requires a resolution passed at a general meeting, special notice and compliance with the statutory procedure, including the director's right to make representations (sections 168–169).
• The articles can be changed by 75%. Shareholders holding 75% of the votes cast can amend the articles by special resolution, subject to any entrenched provisions.
• There is no guaranteed exit. A shareholder has no general right to require the others or the company to buy their shares, and under the model articles the directors may refuse to register a transfer.
• A departing owner keeps their position. An owner who stops working in the business may retain their shares, voting rights and entitlement to any dividends paid in accordance with their share rights.
• Equal owners can reach stalemate. In a 50:50 company, neither owner can outvote the other, and there is no built-in way to break a deadlock.
• Court remedies are a last resort. The main options are an unfair prejudice petition under section 994 of the Act, or a petition to wind up the company on just and equitable grounds under section 122(1)(g) of the Insolvency Act 1986. Both are slow, costly and uncertain.

An example

Two founders each own 50% of a company. One wants to reinvest profits and borrow to open a second site; the other wants to pay dividends and avoid debt. Neither can outvote the other, and the board is split.

Without an agreement, there is no agreed way to resolve the impasse, no obligation on either founder to fund the expansion and no route for one to buy the other out. A well-drafted agreement would say who must approve new borrowing, whether either founder must contribute further funds, and what process applies if they still cannot agree.

What does a shareholders' agreement typically cover?

Every agreement should be tailored to the business, but most deal with the following topics.

1. Decision-making and reserved matters

Day-to-day decisions are usually left to the board of directors. Major decisions, known as reserved matters, require the consent of specified shareholders or of an agreed majority. Typical reserved matters include issuing new shares, significant borrowing, selling the business or its main assets, changing the nature of the business, and directors' remuneration.

The approval threshold must reflect the ownership split. If one owner holds 80% and the threshold is 75%, the 20% owner has no veto. If a particular shareholder is intended to have a veto, the agreement should expressly require that shareholder's consent.

2. The board and management

The agreement can give significant shareholders the right to appoint a director, set the quorum for board meetings, decide who chairs them and require more than one signature for payments above an agreed limit.

3. Issuing new shares

Statutory pre-emption rights under section 561 of the Act already apply to certain allotments of ordinary shares for cash, subject to exceptions, exclusions and disapplication. The agreement can supplement this framework, for example by requiring shareholder consent before any new issue and setting out how offers to existing shareholders are made. New shares will not necessarily carry the same rights as existing shares; that depends on the terms on which they are issued.

4. Transferring existing shares

Most agreements restrict sales of existing shares. Common provisions include:

• Pre-emption on transfer: a shareholder who wishes to sell must first offer their shares to the existing shareholders, usually at an agreed or independently determined price.
• Permitted transfers: transfers to family members, family trusts or companies in the same group may be allowed without triggering the pre-emption process.
• Consent requirements: other transfers may need the approval of the board or of specified shareholders.

5. What happens if an owner leaves

Leaver provisions can require an owner who stops working in the business to offer or transfer their shares to specified purchasers. The agreement should identify the buyer, the valuation method and the payment timetable. Any purchase by the company itself must comply with the statutory buy-back rules in Part 18, Chapter 4 of the Act.

Many agreements distinguish between "good leavers" and "bad leavers", with a higher price for good leavers. These categories are negotiated definitions, not fixed rules. Death and serious ill health are commonly treated as good leaver events, but retirement, resignation and dismissal need carefully defined treatment.

On valuation, the agreement should state whether a minority discount applies and how any independent valuer is appointed if the parties cannot agree a price.

6. Drag-along and tag-along rights

These rights protect both sides on a sale of the company.

• Drag-along: if owners holding an agreed majority accept an offer for the whole company, they can require the minority to sell on the same terms. A buyer will usually want 100% of the shares.
• Tag-along: if the majority sells, the minority can require the buyer to purchase their shares on the same terms.

7. Deadlock

In a 50:50 company, or where a reserved matter requires every shareholder's consent, deadlock is a real risk. In a small business the disputing owners are often the entire management team, so the process should be practical: a meeting between the owners, then mediation, then a clearly defined exit process.

One well-known exit mechanism is the "Russian roulette" clause, under which one owner names a price and the other must either buy or sell at that price. Before adopting it, consider whether both owners could realistically finance a purchase. Otherwise, the mechanism may favour the better-funded owner.

8. Dividends and funding

The agreement can establish a dividend policy, subject to legally available distributable profits (section 830 of the Act), the company's funding needs and directors' duties. It can also say whether owners must provide further funding and on what terms any shareholder loans are made.

9. Restrictive covenants and confidentiality

Owners commonly agree not to compete with the business, solicit its customers or staff, or misuse its confidential information, both while they hold shares and for a period afterwards. These covenants must be no wider than reasonably necessary to protect the business, or a court may refuse to enforce them.

10. Resolving disputes

A clear dispute resolution clause, such as negotiation followed by mediation and then court proceedings or arbitration, can save significant time and cost if a disagreement arises.

When should you put one in place?

Ideally when the company is formed or when a new shareholder joins. Other good moments include:

• bringing in an investor or a key employee as a shareholder;
• a family business passing to the next generation;
• a change in an owner's role, such as stepping back from day-to-day work; and
• before raising finance or preparing the business for sale.

Common mistakes to avoid

• Using a generic template that does not reflect how the business actually operates.
• Leaving the articles unchanged, so that the two documents are inconsistent.
• Setting thresholds that do not match the ownership split, so an intended veto does not exist.
• Incomplete leaver provisions that do not identify the buyer, the price or the timetable.
• No deadlock mechanism in a 50:50 company.
• Not binding new shareholders, who must sign a deed of adherence to be bound.

How Morgan Hill Solicitors can help

Our corporate and commercial team advises founders, family businesses and investors on shareholders' agreements and articles of association. We can draft a new agreement, review and align your existing documents, and advise on leaver, drag-along, tag-along and deadlock provisions.

Arrange a review: call our Head Office on 0203 5000 699 or email info@MorganHillSolicitors.com. Please bring:

• your company's current articles of association;
• details of the current shareholdings (for example, the latest confirmation statement or register of members);
• any existing shareholders' agreement, side letters or loan arrangements; and
• a short note of what you want the agreement to achieve.

About the author

Rao Naeem-ul-Haque Khan is a Solicitor at Morgan Hill Solicitors and manages the firm's Romford office. He has been with the firm since 2020 and practises in commercial and residential property, commercial leases, litigation, and wills and probate. He holds an LLB (Hons) with Commercial Law from City University London and an LLM in Mergers and Acquisitions.

This article provides general information about the law of England and Wales as at November 2026. It is not legal advice and should not be relied on in any particular case. Please contact us for advice on your circumstances.