Before you sign
A shareholders’ agreement sits alongside the company’s articles of association and deals with how the owners work together: who sits on the board, which decisions need shareholder consent, how shares can be sold or transferred, what happens when someone leaves, how shares are valued, and what happens if the owners reach deadlock.
For founders and majority owners, the common problems are missing leaver provisions, no way of forcing through a sale, and consent rights handed to minorities or investors that are wider than intended. For minority shareholders, it is the reverse: no say over major decisions, no right to sell alongside the majority, and a valuation formula that pays out well below what the shares are worth.
QuickLegalCheck reads the whole agreement from your side, rates every clause, flags the protections that are missing and suggests wording. The full report is £49 + VAT. If your articles contain the transfer and leaver provisions, upload them too, because the two documents need to line up.
Why it’s worth checking
Shareholders’ agreements are usually signed at an optimistic moment, when a business is starting out or taking investment, and they get read closely only when relationships have broken down. Reading it properly at the start is far cheaper than finding out later what it does not say.
Take a hypothetical. Three founders set up a company on the standard model articles and never sign a shareholders’ agreement. A few years on, one of them wants out and asks the others to buy their third. There is no obligation on the company or the other founders to buy, no agreed valuation method and no leaver provisions, so the departing founder keeps their shares, and their share of any future dividends and sale proceeds, while no longer contributing. The model articles do let the directors refuse to register a transfer to an outsider, which helps the remaining founders keep strangers out, but it also leaves the departing founder stuck. A shareholders’ agreement with leaver provisions and a valuation mechanism deals with this at the outset.
Investment raises different questions. An investor will usually want board rights and a list of reserved matters that need its consent. That is normal, but the list matters. If it covers ordinary trading decisions, such as hiring above a low salary level or any spending over a small threshold, the founders may find they cannot run the business without asking permission.
Minority shareholders are not wholly unprotected by the general law. The Companies Act 2006 gives statutory pre-emption rights on new share issues for cash (which private companies often disapply), a shareholder with more than 25% can block a special resolution, and any shareholder can petition the court if the company is run in a way that is unfairly prejudicial to their interests. But these are blunt and expensive remedies. Consent rights, tag-along, information rights and a fair exit price in the agreement are far more practical.
Deadlock deserves its own mention. In a 50:50 company where neither side has a casting vote, a serious disagreement can freeze the business. A deadlock clause might start with escalation and mediation and end with a mechanism where one shareholder names a price and the other must either buy or sell at it. Without one, the options can narrow to a negotiated buy-out or, at worst, an application to wind the company up.
Key terms to look for
Share classes and voting rights
What each class of share carries in terms of votes, dividends and return of capital on a sale or winding up. The detail often sits in the articles.
Board composition and reserved matters
Who can appoint directors, and which decisions the board cannot take without shareholder or investor consent.
Dividend policy
Whether profits are expected to be distributed, retained or decided year by year. Dividends can only be paid out of distributable profits.
Transfer restrictions and pre-emption
Whether shares can be sold to outsiders, and whether existing shareholders get first refusal on a transfer or on new shares being issued.
Good leaver / bad leaver
The price at which a departing shareholder, usually one who also works in the business, must sell their shares. Bad leavers typically get a much lower price.
Deadlock resolution
What happens when the shareholders or directors cannot agree, especially in a 50:50 company. Options range from mediation to a buy-sell mechanism.
Non-compete and non-solicitation
Stops shareholders competing with the company or poaching its staff and customers, during and for a period after they hold shares. Must be reasonable to be enforceable.
Drag-along and tag-along rights
Drag-along lets the majority force the minority to sell to a buyer on the same terms. Tag-along lets the minority insist on selling on the same terms if the majority sells.
Exit and valuation
How shares are valued when someone leaves or is bought out, who carries out the valuation and whether a minority discount applies.
Common mistakes
Relying on the articles of association alone
Many companies use the model articles, which say nothing about leavers, deadlock, drag-along, tag-along or valuation. Articles are also public and can be changed by a 75% special resolution. A shareholders’ agreement is private and can give protections, such as individual consent rights, that the articles do not.
No pre-emption rights or transfer restrictions
Without clear transfer provisions, you are relying on the directors’ power to refuse to register a transfer, if the articles give them one. Pre-emption on transfer gives the existing shareholders first refusal before shares can go to an outsider, and pre-emption on new issues protects against dilution.
No agreed valuation mechanism
When a shareholder leaves or is bought out, the price is often the biggest argument. The agreement should say how value is worked out (for example, fair value set by an independent accountant), whether a minority discount applies and who pays the valuer.
No good leaver / bad leaver provisions
Without them, a founder who walks away early, or is dismissed for gross misconduct, keeps their full shareholding. Leaver provisions usually require a bad leaver to sell at a low price, such as the lower of cost and market value, while a good leaver (for example on death or ill health) receives market value. Heavy discounts can be challenged, so the drafting needs care.
No deadlock resolution mechanism
In an equal shareholding, or where a decision needs unanimity, the business can stall. A clause that sets out escalation, mediation and a final buy-sell route gives both sides a way out that does not involve going to court.
Best practice
If you are a majority shareholder or founder, make sure the agreement lets you run the business day to day, with reserved matters limited to decisions that are genuinely significant. Include leaver provisions, a drag-along right so a sale of the whole company cannot be blocked by a small holder, a deadlock mechanism and a clear valuation method. Being fair to minority holders is sensible as well as decent: an agreement that leaves them with nothing gives them every reason to resist you, and makes an unfair prejudice claim more likely if things go wrong.
If you are a minority shareholder or investor, focus on reserved matters that need your consent (or a majority that includes you), such as issuing new shares, changing the articles, taking on major borrowing or selling the business. Ask for tag-along rights so you can sell on the same terms as the majority, pre-emption rights on new share issues and transfers, a board seat or observer right if your stake justifies it, and regular financial information. Check the drag-along threshold and the terms on which you can be dragged, and look carefully at the leaver and valuation terms, including whether a minority discount applies. Make sure the agreement and the articles match, and that anyone who later acquires shares must sign up to the agreement.
Questions
What is the difference between drag-along and tag-along rights?+
Drag-along protects the majority. If holders of an agreed percentage accept an offer for the whole company, they can require the remaining shareholders to sell on the same terms, so a small holder cannot block a sale to a buyer who wants 100%. Tag-along protects the minority. If the majority sells to a third party, the minority can require the buyer to buy their shares too, on the same terms, so they are not left behind with a new owner they did not choose.
Do we need a shareholders’ agreement if we all get along?+
Yes. The point of the agreement is to settle difficult questions while everyone is still on good terms, rather than in the middle of a dispute. It also deals with events nobody controls, such as a shareholder dying, becoming seriously ill, divorcing or becoming insolvent. Without it, shares can pass to someone’s estate or family and the remaining owners have little say.
What should be in the reserved matters section?+
Reserved matters are decisions that need shareholder approval, either unanimously or by a set majority, rather than just a board decision. Typical items are issuing new shares, changing the articles, borrowing above a set amount, selling major assets or the business, buying another business, paying dividends, related-party transactions, changing the nature of the business and winding up. They protect a minority only if the approval threshold is set so that the minority’s consent is needed.
How should shares be valued when a shareholder leaves?+
Common approaches are fair or market value set by an independent accountant, a formula (such as a multiple of profits) or net asset value. Each has drawbacks: net assets can undervalue a profitable service business, and formulas can go stale. The agreement should say which method applies, who appoints the valuer, who pays, and whether the shares are valued as a proportion of the whole company or with a discount for being a minority stake, which can make a large difference to the price.