Shareholders' agreement

A company's articles of association govern the company. A shareholders' agreement governs the shareholders, and it is where the questions that actually cause fallings-out are answered: who has to agree before the company does something significant, what happens to a founder's shares when they walk away, and how a disagreement between two equal owners is broken rather than left to fester.

Two shareholders with fifty per cent each and nothing but Model Articles have no mechanism for resolving a dispute. Neither can pass a resolution the other opposes, and the company stops. That is the situation this document exists to prevent.

What the template covers

Reserved matters, meaning the decisions that need shareholder approval rather than a board vote, tailored in Schedule 2, which are the practical limit on what a majority owner can do alone. Pre-emption rights, so shares cannot be sold to an outsider without being offered round first. Drag along and tag along, which protect a majority selling the company and a minority who would otherwise be left behind. Leaver provisions, with two options at clause 12 to choose between. Deadlock. And restrictive covenants on a shareholder who leaves.

The part most people miss

The agreement has to be read alongside the articles, and unamended Model Articles will not fit it. Clause 18 requires the articles to be amended at the same time, and skipping that step is the commonest reason a shareholders' agreement fails to do what its owners believed it did. Where the two conflict the position is not simply that the agreement wins: the articles bind the company and are a public document, while the agreement binds only those who signed it.

Who it is for, and who it is not

It is drafted for a private company limited by shares owned by two or more shareholders who are involved in running it. It is not an investment document. An external funding round brings a subscription agreement, investor consent rights, warranties and often a new share class, and using this template for that purpose creates work rather than saving it.

Where the company has real value, where the shareholdings are unequal, or where a shareholder is also an employee, the interaction between the leaver terms and the employment contract is worth a solicitor's eye. A good leaver and bad leaver mechanism that fires on dismissal is a serious commercial term, not boilerplate.

When to put one in place

At incorporation, or at the point the founders can still agree what should happen because nothing has gone wrong yet. An agreement negotiated after a relationship has soured rarely gets signed.

Our commercial solicitors draft these alongside the article amendments so the two documents agree, and our startup team handles the founder version.