What is a Shareholders’ Agreement?

A shareholders’ agreement is a type of contract entered into between the owners of a company (also known as shareholders or members) and can also bind the company itself. It can be concluded between either all or some shareholders and it governs how the business is run, how decisions are made and what happens when things change or go wrong.

A shareholders’ agreement is very important to have when a business has multiple owners. As it is a private contract, it is not a mandatory legal requirement like the company’s articles of association, but it is very good to have. It can cover everything from voting rights and management responsibilities to share transfers. In the event of disputes, it can also set out a dispute resolution process. It does not have to be made public and published at Companies House.

A common scenario

Take as an example, two co-founders launch a software company, each holding a 50 percent share and do not have a shareholders’ agreement. A year later, one founder starts another full-time role elsewhere and stops contributing to the company but they keep their 50 percent share.

The remaining founder continues to build the company alone, yet the absent founder remains entitled to half its value. Further complications can also arise such as an investor offering funding but the absent founder declines to approve the deal. With the ownership split equally the company is in a deadlock. The absent founder could also potentially sell their shares to anyone including the owner of a competing business.

Without a shareholders’ agreement, the remaining founder is restricted in their management of the company.. They have no automatic right to acquire the other shares, override the other’s vote or prevent a sale to a third party. To resolve these matters would likely require a lengthy negotiation or litigation.

How a shareholders’ agreement protects founders

With the example above, had the founders entered into a shareholders’ agreement at the start, it could have addressed each of these issues:

- **Rules for leaving.** If a founder stops working for the business, they can be required to sell some or all of their shares back. That way the ownership reflects who is actually doing the work. - **A way out of a disagreement.** A clear process for settling disagreements, such as bringing in an independent mediator, or letting one founder by out the other at a fair price. - **First refusal on shares.** A founder who wants to sell must offer their shares to the other shareholders first. - **Clear expectations.** Agreed commitments on how much time each founder puts in, and a promise not to set up or work for a competing business.

When should you implement a shareholders’ agreement

The ideal time is when you have multiple founders starting a business or have additional founders joining an existing business. If you raise investment (particularly through venture capital), you can expect incoming investors to insist on a standard form of Shareholder Agreement. This may be based on industry standards such as the UK Private Capital (UKPC) model templates.

How we can help

Our team helps founders put shareholders’ agreements in place that best suit their business. Whether you are starting out, bringing in a new shareholder, or checking your current arrangements, get in touch for a consultation.