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Shareholders’ Agreements

Blacks Solicitors’ Corporate team regularly support clients with drafting and reviewing their Shareholders’ Agreements.

Shareholders are the legal owners of a company and may or may not have a direct involvement with the day‑to‑day running of the company, as this is the responsibility of the executive (i.e. the board of directors) of that company. However, in SME businesses, the shareholders of a company are often also directors of a company.

A Shareholders’ Agreement is an agreement between the shareholders of a private limited company which regulates the relationship between those shareholders (and the company, if appropriate) from both a legal and operational perspective.

The Shareholders’ Agreement is a private contractual arrangement between the shareholders and is not open to public scrutiny, unlike the Articles of Association of a private limited company.

It is often advisable for certain provisions to be contained in a Shareholders’ Agreement as opposed to incorporating them into the Articles of Association as there may be sensitive and/or confidential matters which they wish to keep private and between themselves.

It is common for a Shareholders’ Agreement to take precedence over a company’s Articles of Association in terms of contractual priority.

Below is a non‑exhaustive list of pertinent matters which are commonly dealt with in a Shareholders’ Agreement:

  • Business objectives, road map of the business, and business plan
  • Matters/decisions reserved for the consent of a set percentage (in voting power) of the shareholders, for example 51%, 75%, 100%
  • Restrictions on the transfers of shares (we would usually ensure pre‑emption rights are afforded to the other shareholders in the event that one of the shareholders wishes to transfer their shares). This is often very important to private limited companies to ensure the ownership of the shares of the company remain with the people originally involved, or at least allow such people to have the opportunity to acquire such shares before they can be sold to a third party
  • Mandatory transfer or compulsory transfer of shares. A mandatory or compulsory transfer usually occurs when a shareholder ceases to be involved with a company (for example, by way of death, critical illness, dismissal from employment with the company, etc). In such circumstances, it is usually appropriate for said person (or their personal representative/s) to cease to hold shares in the company as they are no longer involved.  The Shareholders’ Agreement will contain a mechanism to determine the price paid to the shareholder (or their personal representative/s) depending on whether they are a good leaver or a a bad leaver
  • Exit strategy
  • Come along or drag along obligations
  • Tag along obligations
  • Ownership and protection of intellectual property
  • Issue and allotment of further shares in the company
  • Restrictive covenants to protect the company and the shareholders’ interests in the company
  • Deadlock resolution
  • Financing arrangements
  • Directorships
  • Dividend policy
  • Confidentiality

Frequently Asked Questions

Why have a Shareholders’ Agreement?

There is no legal obligation to have a Shareholders’ Agreement, however it is good practice and prudent corporate governance to have one. It provides the shareholders with more certainty around the relationship with their fellow shareholders and greater control and clarity in respect of the running and operation of the company which they own.

The Shareholders’ Agreement will set out the terms upon which the various shareholders are getting into business together and, in essence, set out rules of engagement for the enterprise so that all parties are clear from the outset as to the road map and the rules of their involvement in that company.

All businesses will have to be dynamic and adjust their course from time to time so it is important that any Shareholders’ Agreement (whilst providing certainty around the rules) doesn’t constrict or restrict the company’s ability to be flexible when necessary.

An Shareholders’ Agreement may, and should, be reviewed regularly, to remind the parties of the terms. However, if a party is looking to invoke the terms of the agreement this would usually indicate the relationship between the shareholders may have broken down, perhaps irrevocably, and this is when the existence of the Shareholders’ Agreement will be priceless, both in terms of resolving any such dispute or deadlock, but also in ensuring the future of the company or agreeing an appropriate exit for all.

Who needs a Shareholders’ Agreement?

We would recommend that any private limited company with more than one shareholder has a Shareholders’ Agreement and that the agreement is entered into as early as possible in the company’s lifecycle, as once the business is up and running and gaining traction the question of the Shareholders’ Agreement (whilst still being acknowledged as important), often falls away down the priority list.

In addition, as a business grows the respective bargaining positions of different parties involved may change and, what would have been agreed when the company was originally incorporated may well not be agreed now the company is more mature, has more value, and respective individuals’ negotiating positions have changed.


If you have any queries regarding Shareholders’ Agreements, or any questions relating to private limited companies, please get in touch with our Corporate team today via email or call 0113 207 0000.

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