Planning for the Future: What to Include in a UK Shareholders' Agreement

A shareholders' agreement is one of the most important documents a company can have in place. Even when shareholders are aligned at the outset, circumstances change, and without a clear agreement governing how the company is run and how disputes are resolved, disagreements can quickly escalate.

What is a shareholders' agreement?

A shareholders' agreement is a private contract between the shareholders of a company. It sets out the rights and obligations of each shareholder, the rules governing how the company is managed, and the procedures for dealing with key events such as the sale of shares, the introduction of new investors, or the resolution of disputes.

Why do you need one?

While a company's articles of association provide a basic framework for governance, they are a public document and may not cover all the matters that shareholders wish to agree upon. A shareholders' agreement allows shareholders to deal with sensitive commercial matters in a confidential document and to tailor the governance arrangements to suit the specific needs of their company.

Key provisions to include

A well-drafted shareholders' agreement should cover decision-making processes, including which matters require unanimous consent and which can be decided by a simple majority. It should also address the appointment and removal of directors, dividend policy, funding obligations, restrictive covenants, and the circumstances in which a shareholder may be required to sell their shares.

Share transfer provisions

One of the most important sections of any shareholders' agreement relates to the transfer of shares. Pre-emption rights give existing shareholders the first right to purchase shares before they can be offered to third parties. Tag-along and drag-along provisions protect minority and majority shareholders respectively when a sale of the company is proposed.

Deadlock and dispute resolution

Where shareholders hold equal stakes, there is a risk of deadlock if they cannot agree on a key decision. A shareholders' agreement should include a mechanism for resolving deadlocks, whether through mediation, arbitration, or a buy-out procedure.

If you would like advice on putting a shareholders' agreement in place, or reviewing an existing agreement, please contact our corporate team.