A shareholders’ agreement is one of the most important documents for companies with more than one owner. Think of it as a business prenup: it sets out how decisions are made, what happens if disputes arise and how shareholders can exit. Unlike the Articles of Association (a public document filed at Companies House), a shareholders’ agreement is private and tailored. This guide explains what they are, why they matter, the key terms to include, common pitfalls to avoid and lessons from real cases.
What is a shareholders’ agreement?
A shareholders’ agreement is a legally binding contract between the shareholders of a company outlining their rights, responsibilities and how the company will be run. It supplements the company’s Articles of Association by covering practical and financial arrangements that may not be detailed there.
In essence, it sets ground rules for the business relationship: it can cover everything from how decisions are made and profits are shared to what happens if a shareholder wants to sell their shares or if the company needs more capital.
Key characteristics of the shareholders’ agreement:
- It is a private document: it does not need to be filed with the Companies House, so its contents remain confidential to the parties. This contrasts with the Articles of Association, which are publicly available to anyone who searches the company records.
- It has contractual force: it is a contract signed by the shareholders (and sometimes the company itself) and is enforceable in court like any other contract. If a party breaches the agreement, the others can seek remedies such as damages or injunctions to enforce the terms.
- It has a wide scope: because it is a private contract, a shareholders’ agreement can deal with almost any aspect of the relationship between shareholders – including personal promises and obligations that normally would not be in the company’s constitutional documents. For example, shareholders can agree to vote in a certain way on major decisions or even commit to working for the company which are matters that Articles of Association alone might not cover.
- It is not legally required: there is no legal requirement for a company to have a shareholders’ agreement. A company can technically operate under just its Articles of Association and general company law. However, as we will see, not having one can be a recipe for future conflict and uncertainty.
So why do you need a shareholders’ agreement?
SMEs often ask whether they really need a shareholders’ agreement – particularly if the company has been started among friends or family. The short answer is yes – if you have more than one owner. And here is why:
1. Clarity and avoiding disputes
A good shareholders’ agreement sets clear expectations on each shareholder’s roles, rights and what is or is not allowed. By agreeing on rules up front (when everyone is on good terms), you can reduce the chances of misunderstandings and conflicts later. For instance, the agreement can spell out how decisions are made or how profits are distributed, so there is no argument when those situations arise. It also typically provides mechanisms for resolving disputes before they escalate – preventing disagreements from turning into expensive legal battles.
2. Protecting minority shareholders
If you hold a minority stake in a company, a shareholders’ agreement is often the best protection. Company law and standard Articles of Association may not give you much say in major decisions. With a tailored shareholders’ agreement, you can negotiate minority protection provisions – like requiring your consent for certain big decisions. This means the majority cannot simply override you on critical issues without discussion. For example, issuing new shares, taking on large debts or changing the core business might require unanimous approval or a high threshold, protecting minorities from dilution or fundamental changes they never agreed to. In practice, having these protections in writing is crucial, otherwise a majority shareholder could legally make decisions that severely impact minority owners (leaving the minority with little recourse other than a difficult court battle).
3. Stability for the business
From the company’s perspective, a shareholders’ agreement provides stability and continuity. It lays out what happens if a shareholder wants to exit, becomes bankrupt or even passes away. Without an agreement, such events can throw a business into turmoil. For example, if one of the partners suddenly leaves, will the others have the right to buy their shares? At what price? The shareholders’ agreement can answer these questions in advance. This kind of planning ensures the business can carry on with minimal disruption.
It is no exaggeration to say that a well-drafted shareholders’ agreement can save a company’s life.
4. Preventing costly legal issues
In the absence of a shareholders’ agreement, if serious disputes arise, shareholders may have to fall back on general legal remedies. One such remedy in UK law is the ‘unfair prejudice’ petition under section 994 of the Companies Act 2006, where a minority shareholder asks a court for help because the company’s affairs are being run in a way that is unfair to them. While this protection exists, it is a heavy, costly weapon to deploy. Going to court is time-consuming, expensive and the outcome is uncertain. By contrast, a shareholders’ agreement is a form of self-help: it can include agreed dispute resolution steps and clear rules that all parties signed up to, thereby hopefully avoiding the need to involve courts at all.
5. Real-life lesson – avoiding the ‘no agreement’ nightmare
To illustrate, consider a real case handled by EM Law. A minority shareholder invested her savings into a business that she started with a partner. They never signed a shareholders’ agreement. When the relationship soured, she found herself shut out of decision-making and even from the company bank account. As a minority shareholder with no agreed exit plan, she had limited leverage – the majority shareholder controlled the board and finances. Ultimately, lawyers at EM Law had to invoke general company law (breach of fiduciary duties, unfair prejudice, etc.) to negotiate her exit and get her investment back. The process was stressful and costly for everyone involved. The clear takeaway is that if a shareholders’ agreement had been in place outlining rights and an exit strategy, much of this pain could have been avoided. Unfortunately, scenarios like this are common – business partners who start off optimistic can and do fall out, and without a prior agreement, the fallout can be disastrous.
6. Investor requirement
If you are seeking outside investment, a shareholders’ agreement is often non-negotiable. Professional investors will insist on one as a condition of investing. They want formal assurances about how the company will be governed and how they can eventually exit (e.g. via a sale). Even if you are just pooling funds with a friend or two, having an agreement can give everyone (including lenders or potential buyers of the business) confidence that the company is well-managed and disputes are minimised.
While you can run a company without a shareholders’ agreement, doing so is risky. The shareholders’ agreement is essentially an insurance policy and rulebook combined - it forces tough conversations early so that you are not scrambling or litigating later. It is far cheaper to agree on rules at the start than to pay lawyers to resolve a mess afterward.
Common pitfalls and what to watch out for
Even a well-intentioned shareholders’ agreement can go wrong if it’s not thoughtfully prepared and maintained. Below we outline some common mistakes to avoid:
Not having an agreement at all (or ‘we will sort it out later’): the biggest mistake is simply failing to put a shareholders’ agreement in place when you should. It is easy to be optimistic at a company’s outset, but many business partners have fallen out spectacularly despite starting with trust and goodwill. If you have no agreement, you are left with the default law and any basic provisions in your Articles of Association, which often do not adequately cover real-world disputes. For example, the default Model Articles of Association have no provisions for resolving shareholder deadlocks and omit many important protections. They are deliberately minimal, which means protections need to be added through bespoke Articles of Association or a shareholders’ agreement.
The consequences of having no agreement (or a very basic one) can be severe: founders stuck in deadlock with no exit, minority investors who realise they have no say in key decisions or a valued partner walking away and even setting up a competitor using the know-how they gained. In fact, some of the most common shareholder disputes we see arise where there was no prior agreement and the parties must then spend a lot of time and money negotiating or litigating an exit after relations have soured.
That is why, if your company has more than one owner, it is essential to put a shareholders’ agreement in place as early as possible. It is far easier to agree fair rules upfront than once a dispute has already arisen.
- Using a generic ‘one-size-fits-all’ template: not all businesses are the same and neither are their shareholders. Yet a common pitfall is downloading a boilerplate shareholders’ agreement from the internet or copying one from another company, without tailoring it to your situation.
For instance, it might include irrelevant clauses and miss important ones. Perhaps it assumes all shareholders are also directors, but in your case some investors are not which means certain management clauses will just not make sense. Or it might not reflect your specific shareholding split or industry regulations. Many broad templates also fail to capture the true intentions of the parties. The risk is that you end up with an agreement that looks comprehensive but does not actually work when a real issue arises.
- Letting the document gather dust: businesses evolve – you might take on new partners, pivot your business model or grow from 3 shareholders to 10. A common pitfall is forgetting to update the shareholders’ agreement to reflect these changes. An outdated agreement can quickly become irrelevant or even counterproductive.
For instance, perhaps the agreement was written when two founders each owned 50%. Now you have raised capital and there are five shareholders with different stakes – those old 50/50 mechanisms might no longer make sense or new issues (like preferential shares for an investor) may not be covered. That is why it is important to review your shareholders’ agreements periodically. A good rule of thumb is once a year or whenever a significant event happens. Also, each time a new shareholder joins, have them formally agree to the existing document or update the agreement if necessary to accommodate them.
- Ignoring alignment with the Articles of Association: the Articles of Association and the shareholders’ agreement are two sides of the same coin. If they conflict, it can create confusion or even legal issues. For example, if your Articles of Association say ‘only a 51% majority is needed to appoint a director’ but your shareholders’ agreement says ‘at least 75% or unanimous approval is required to appoint a director,’ there is an inconsistency. Generally, the Articles of Association govern the company’s official actions vis-à-vis outsiders, whereas the shareholders’ agreement binds the parties internally. A third party (or a new shareholder who is not a party to the agreement yet) might rely on what the Articles of Association say.
Courts have held that the company must follow its Articles of Association, but if a shareholder violates the private agreement in causing the company to act, they can be liable for breach to the other shareholders. If the shareholders all agree in the shareholders’ agreement that no new shares should be issued without everyone’s consent, you can also mirror this in the company’s Articles of Association by saying that new shares may only be issued with a higher level of shareholder approval, such as a special resolution or unanimous consent. The reason for doing both is that the shareholders’ agreement binds the existing shareholders, while the Articles of Association bind anyone who later becomes a shareholder. However, the case of Russell v Northern Bank Development Corp Ltd [1992] 1 W.L.R. 588 makes clear that you cannot go so far as to strip the company itself of its legal right to issue shares altogether. What you can do is make it more difficult by raising the approval threshold – so you are not taking the power away, just ensuring it can only be used if enough shareholders agree.
- No mechanism for forced exit of problematic shareholders: if a shareholder becomes a serious problem (say they are convicted of a crime, grossly underperform in an agreed role or cause harm to the business reputation), you may need a way to force them out for the sake of the company. Without any mechanism, you could be stuck indefinitely with a toxic partner. Many agreements include ‘good leaver/bad leaver’ clauses especially when some shareholders are also employees or directors. This means if someone leaves in good faith (resignation, retirement, illness – a good leaver), the company or others might buy their shares at a fair value. But if they are a bad leaver (fired for cause or compete in breach of the agreement), the agreement might allow a buyout of their shares at a discounted price (or original cost), effectively penalising bad behaviour.
- Share transfers and new equity: the Model Articles of Association only deal with share transfers and the issue of new shares in a very limited way, and they do not provide the safeguards most shareholders would expect. This can leave shareholders exposed if no further rules are agreed.
Without restrictions, majority shareholders could issue new shares to themselves or their allies, diluting others. Conversely, if minority shareholders are given excessive blocking rights, they may frustrate vital fundraising. The usual solution is to include pre-emption rights on new share issues and transfer restrictions in the Articles of Association or a shareholders’ agreement.
Shareholders’ agreements in action – a recent case
The High Court recently ordered the winding up of a property company owned equally by two individuals who had reached a complete deadlock.
In Dosanjh v. Balendran & Webb Estate Developments Ltd [2025] EWHC 507 (Ch), the two shareholders (who were also directors) had carried on business together for years, but their relationship deteriorated badly. One offered to buy out the other, but they could not agree on terms and trust was gone. The petitioner, Mr. Dosanjh, asked the court to wind up the company, essentially saying ‘we cannot run this company together anymore.’
The court stressed that winding up a solvent company is a remedy of last resort. Under s.125 Insolvency Act 1986, the court must consider whether some other remedy is available and whether the petitioner is acting reasonably in seeking a winding-up order instead. In this case, the judge was satisfied that the threshold was met: there was both a functional deadlock paralysing management and an irretrievable breakdown of trust. No alternative remedy, such as one shareholder buying out the other, was workable in the circumstances. The company was therefore ordered to be wound up.
This case shows how destructive a deadlock can be. Rather than preserving value, liquidation meant the company’s assets had to be sold off and the business brought to an end. Had there been a robust shareholders’ agreement with a deadlock resolution clause or buy-sell mechanism, the parties could have avoided court and preserved more value. For example, the agreement might have required an independent valuation and a compulsory buyout at the first sign of stalemate. This decision also illustrates that courts will usually expect the parties to explore realistic alternatives before resorting to winding up.
Conclusion
A well-drafted shareholders’ agreement is more than just a formality. It is a practical safeguard for your business. For SMEs in particular, where relationships and trust are often the glue holding things together, it provides clarity, stability and protection when circumstances change. By setting clear rules in advance, you reduce risk of disputes, protect minority and majority interests and give your company a solid foundation for growth.
Every company with more than one shareholder should think carefully about putting a shareholders’ agreement in place early, before problems arise. It is far easier and cheaper to agree fair terms at the outset than to resolve a dispute later.
Thinking about putting a shareholders’ agreement in place or want a second pair of eyes on one you already have? Get in touch with us here or have a chat with our solicitors Barry Doherty or Neil Williamson – we are here to help.
FAQs
What is the difference between Articles of Association and a shareholders’ agreement?
The Articles of Association are the company’s public rulebook, filed at Companies House. They set out how the company is run (for example, how directors are appointed, how meetings are held and how shares can be issued). A shareholders’ agreement is a private contract between shareholders (and sometimes the company) that adds extra rules and protections. It can cover matters like dividends, exits or what happens if a shareholder wants to leave – areas often not fully addressed in the Articles of Association.
When do I need to create a shareholders’ agreement?
Ideally, as soon as you have more than one shareholder. That way, everyone knows their rights and obligations from the start and you avoid problems later. You can also put one in place later if circumstances change, for example when new investors come in, when you set up an employee share scheme or if shareholders want more protection than the Articles of Association provide.
Can I change the shareholders’ agreement later on?
Yes, but only if all the parties to the agreement agree. Because it is a private contract, changes usually require unanimous consent from the shareholders who signed it (or their successors). In practice, this means updating the agreement whenever new shareholders join, investors come on board or the business grows and your needs change.
What is a tag-along right?
A tag-along right protects minority shareholders when the majority decide to sell their shares. It allows the minority to ‘tag along’ and sell their shares on the same terms as the majority. For example, if a majority shareholder finds a buyer willing to pay £10 a share, the minority can require the buyer to purchase their shares at £10 too. This prevents minorities being left behind under the control of a new owner they did not choose.
