Shareholder agreements: what to include and why

What a shareholder agreement is

A shareholder agreement is a contract between some or all of the shareholders in a company, and often the company itself, about how the company will be owned and run. It deals with the matters that the Companies Act 2006 and a standard set of articles leave open: who makes which decisions, how profits are paid out, what happens to a shareholder's shares when they leave, fall ill or die, and how the owners resolve a disagreement they cannot settle between themselves.

It matters most in companies where the owners also work in the business. There, a shareholder's income, job and investment are tied together, and a dispute about one quickly becomes a dispute about all three. An agreement written while the owners are on good terms sets out the answers in advance, when each of them can consider the position both as the person who might leave and as the person who might stay.

The agreement binds only the people who sign it. When a new shareholder joins, whether an investor, a new director or a family member, they should sign a short document, usually called a deed of adherence, agreeing to be bound by its terms.

How it works with the articles of association

Every company has articles of association, which form the main part of its constitution. A company formed on or after 1 October 2009 that did not register its own articles has the model articles in the Companies (Model Articles) Regulations 2008 by default (section 20), and many companies adopt them with small changes. Companies formed before that date usually have articles based on older standard forms, which differ in places. The articles are filed at Companies House where anyone can read them, and if they are amended the company must send a copy of the amended articles to Companies House within 15 days of the amendment taking effect (Companies Act 2006, section 26). Under section 33, the articles bind the company and its members as if each had agreed to observe them.

The articles and the shareholder agreement do different jobs and have to be read together. The articles can be changed by special resolution, which needs at least 75% of the votes (sections 21 and 283), so a shareholder or group holding 75% can change them without anyone else's consent, unless the articles contain entrenched provisions (section 22). A shareholder agreement is a separate contract that can only be changed with the consent of those who signed it, so it can give minority shareholders protections the articles alone cannot, such as a requirement for every shareholder to agree before certain decisions are made. It is also normally kept private rather than filed.

The model articles leave out many protections owners expect. They contain no right for the other shareholders to buy a departing shareholder's shares, no valuation method and no way through deadlock. They do give the directors a general power to refuse to register a transfer of shares (Schedule 1, article 26(5)), and they give the director chairing a directors' meeting a casting vote if the votes are tied (article 13). Where a company adopts its own articles, they should be drafted alongside the shareholder agreement so that the two documents do not contradict each other, because a conflict leaves the owners arguing about which document governs.

Who decides what

Company law sets the default voting thresholds. An ordinary resolution of the shareholders needs a simple majority (section 282), and a special resolution needs at least 75% (section 283). A shareholder with more than half the votes can therefore remove a director by ordinary resolution under section 168, whatever the director's service agreement says, provided special notice of the resolution is given to the company at least 28 days before the meeting (section 312). Day-to-day decisions are made by the directors, and under the model articles the quorum for a directors' meeting is two unless the directors fix a different number (article 11).

A shareholder agreement can adjust that balance in three ways:

• a list of reserved matters that need the consent of all shareholders, or of an agreed majority, such as issuing new shares, borrowing above a set limit, selling the business, changing what the company does or changing directors' pay;
• a right for each founder, or each shareholder above a set percentage, to appoint a director, so that nobody can be shut out of management while they remain a significant shareholder;
• rights to receive management accounts, budgets and board papers, which matter most to shareholders who are not directors.

The list of reserved matters should protect minority shareholders on the decisions that affect their investment while leaving the company able to operate. Requiring unanimous consent for routine spending can stop a business functioning.

Funding, dividends and new shares

Owners often put money into a company in different ways: some as share capital, some as loans, and some by giving personal guarantees to the company's bank. The agreement should record who has contributed what, whether shareholder loans carry interest and when they are repaid, and whether shareholders can be asked for further funding. If one owner has given a personal guarantee and the others have not, the agreement can require the others to share any loss under it.

Dividends can only be paid out of profits available for distribution (section 830). Under the model articles, a dividend is declared by ordinary resolution on the directors' recommendation, or paid as an interim dividend by decision of the directors (article 30). Where some owners work in the business and draw salaries and others do not, an agreed dividend policy avoids arguments about profits being kept in the company, or paid out as salary, to one group's advantage.

When a company issues new shares for cash, existing holders of ordinary shares have a statutory right to be offered them first in proportion to their holdings (sections 561 and 565). A private company with only one class of shares can give its directors power to allot shares as if that right did not apply, through its articles or by special resolution (section 569). A shareholder agreement normally controls when new shares can be issued, at what price and with whose consent, so that a minority is not diluted without agreement.

Selling shares and bringing in new owners

Without specific provisions, a shareholder who finds a buyer can try to sell to anyone, subject to the directors' power under the model articles to refuse to register the transfer. If the directors refuse, the company must give the buyer notice of the refusal with its reasons, as soon as practicable and within two months of the transfer being lodged (section 771). That power is a blunt tool, and it gives the remaining owners no right to buy the shares themselves.

A shareholder agreement can deal with this through a right of first refusal, often called pre-emption on transfer. A shareholder who wants to sell must first offer the shares to the other shareholders, at a price that is either agreed or set by an independent valuer, before selling to anyone else. There are normally exceptions for transfers to family trusts or to a shareholder's own holding company, with safeguards so that the shares return if that relationship ends.

Two further clauses deal with a sale of the whole company. A drag-along clause allows shareholders holding an agreed proportion of the shares, for example 75%, to require the others to sell to a genuine third-party buyer on the same terms, so that a small holder cannot block a sale the other owners want. A tag-along clause works the other way: if a majority holder sells, the minority can insist on being bought out on the same terms. On any sale of shares made with a stock transfer form, the buyer pays stamp duty of 0.5% of the price where the price is over £1,000, rounded up to the nearest £5.

When a shareholder leaves the business

Problems arise when a shareholder stops working in the business but keeps their shares. They continue to share in the profits and growth created by the owners who are still working, and they may still be able to block decisions. A shareholder agreement deals with this by requiring a shareholder who leaves employment, or stops being a director, to offer their shares for sale to the other shareholders or to the company.

The price can depend on why the shareholder left. A shareholder who leaves because of death, ill health or retirement, often called a good leaver, may be entitled to full value. A shareholder who resigns within an agreed period or is dismissed for misconduct, often called a bad leaver, may be paid less, for example the lower of market value and the price they originally paid. Each category needs to be defined precisely, because the difference in price can be large.

Clauses that reduce what a shareholder receives are generally enforced when they are clear and commercially justified. In Cavendish Square Holding BV v Makdessi [2015] UKSC 67, the Supreme Court upheld clauses in a share sale under which a seller who broke his non-compete covenants lost the final instalments of his price and could be required to sell his remaining shares at a value excluding goodwill. The court held that a clause taking effect on a breach is an unenforceable penalty only if it imposes a detriment out of all proportion to the other side's legitimate interest in the obligation being performed.

The agreement also has to say how value is worked out and how it is paid. Common approaches are an agreed formula, or a valuation by an independent accountant acting as an expert, with instructions on whether a minority holding should be discounted because it does not carry control. If the company is to buy the shares back itself, it must follow the rules in Part 18 of the Companies Act 2006, which include paying for the shares at the time they are bought (section 691) and funding the purchase from distributable profits or the proceeds of a new share issue unless the procedures for paying out of capital are followed (section 692). Where the other shareholders are the buyers, the agreement can allow payment in instalments, with security for the departing shareholder.

Death, illness and divorce

When a shareholder dies, their shares pass to their personal representatives and then to whoever inherits under the will or the intestacy rules. Under the model articles, the personal representatives cannot attend or vote at general meetings in respect of the shares until they become the registered holders (article 27). The result can be a family holding shares in a company they do not work in, with no say over dividends and no buyer, alongside surviving owners who must share future profits with them.

A shareholder agreement can give the other shareholders, or the company, a right to buy a deceased shareholder's shares at a fair value, and can give the estate a right to require them to buy. Life insurance can fund the purchase. How those rights are worded affects inheritance tax: an agreement that binds both sides to buy and sell on death can prevent the shares qualifying for business relief, while an arrangement based on options does not. Our guide to cross-option agreements explains how this works, and your will should be consistent with whatever the agreement says.

The agreement should also deal with long-term incapacity, where a shareholder can no longer work but has not died, and with a shareholder's bankruptcy. Divorce is harder to plan for, because on divorce the court can order one spouse to transfer property to the other, which can include shares (Matrimonial Causes Act 1973, section 24). The agreement can require shares that end up with someone outside the business to be offered to the other shareholders, although how that interacts with a court order depends on the circumstances.

Deadlock and disputes

Deadlock is a particular risk in a company with two equal shareholders or two equal groups. With 50% each, neither side can pass an ordinary resolution. If each has a seat on the board, the casting vote under the model articles belongs to whichever director chairs the meeting, which can give one side control of board decisions without anyone having intended it.

A shareholder agreement can set out a sequence of steps. The first is normally escalation, with the owners required to meet and try to resolve the issue within a set period, followed by mediation. For disputes about value or accounting, referral to an independent expert produces a binding answer relatively quickly. Where the deadlock concerns the future of the company, the agreement can include a buy-sell procedure under which one shareholder names a price per share and the other must either sell at that price or buy at it, which encourages a fair offer. Some agreements instead provide for the company to be sold or, as a last step, wound up.

Where there is no agreement, or it does not cover the problem, the remaining routes are court applications, which are slow and costly. A shareholder can petition the court on the ground that the company's affairs are being conducted in a way that is unfairly prejudicial to their interests (section 994), and the court can wind up a company where it is just and equitable to do so (Insolvency Act 1986, section 122(1)(g)). Our guide to shareholder disputes explains those options.

When to put an agreement in place

The best time is when the company is formed or a new shareholder joins, because each owner is negotiating before they know which side of any future dispute they will be on. The next opportunity is before a significant change, such as an investment, a founder reducing their hours, a family member joining or a sale being discussed. Agreeing terms after a falling-out is possible, but every clause then becomes part of the dispute.

The work normally involves a meeting to go through the issues above, a first draft of the agreement and any new articles, a round of comments from each shareholder, and signing. Where shareholders' interests differ, for example between an outside investor and the founders, each side should take its own advice. The time and cost depend on the number of shareholders, whether there are different classes of shares or outside investors, and how much negotiation is needed. We agree the scope and cost in writing before we start.

Once the agreement is signed, any new articles must be filed at Companies House within 15 days, the register of members must be up to date, and the agreement should be reviewed when shareholdings change, when someone stops working in the business, or when the insurance that funds a buyout is renewed or changed.

Frequently asked questions

Is a shareholder agreement legally binding?

Yes. A shareholder agreement is a contract, so it binds everyone who signs it and can be enforced through the courts, for example by claiming damages or asking for an order requiring a shareholder to comply. It does not bind people who have not signed it, so anyone who becomes a shareholder later should sign a deed of adherence agreeing to its terms. It sits alongside the articles of association, and the two should be drafted so that they do not contradict each other.

Does a shareholder agreement need to be filed at Companies House?

A shareholder agreement usually does not need to be filed. It is normally a private contract, unlike the articles of association, which are on the public register and must be re-filed within 15 days of any amendment taking effect. Some agreements made by all the shareholders count as agreements affecting the company's constitution and must be filed, so the structure of the agreement should be checked. Keeping valuation formulas and leaver prices in the agreement rather than the articles keeps them off the public register.

What happens if two 50% shareholders cannot agree?

Without a deadlock clause, neither can pass a shareholder resolution, and board decisions may turn on who chairs the meeting, because the model articles give the chair a casting vote when directors' votes are tied. A shareholder agreement can require the owners to escalate the issue, try mediation or refer valuation questions to an independent expert, and can include a procedure for one owner to buy the other out. If nothing has been agreed, the remaining options are court applications, such as an unfair prejudice petition or a winding-up petition.

Can a majority shareholder remove me as a director?

Yes. Under section 168 of the Companies Act 2006, shareholders can remove a director by ordinary resolution at a meeting, with special notice given to the company at least 28 days beforehand. This applies whatever your service agreement says, although you may have a claim for compensation under that agreement. A shareholder agreement can protect you, for example with a right to be appointed as a director while you hold an agreed percentage of the shares, or a right to be bought out at a fair value if you are removed.

What is a drag-along clause?

A drag-along clause allows shareholders holding an agreed proportion of the shares, often a large majority, to require the remaining shareholders to sell their shares to a third-party buyer on the same terms. It stops a small shareholder blocking a sale of the whole company that the other owners want to accept. The clause should set the threshold, require the same price and terms for everyone, and limit the warranties and liabilities a minority shareholder can be required to give.

How are a leaving shareholder's shares valued?

They are valued in the way the shareholder agreement or articles set out, so the valuation clause needs care. Common approaches are a fixed formula, a price agreed each year, or a valuation by an independent accountant acting as an expert. The clause should say whether a minority holding is valued as a proportion of the whole company or discounted because it carries no control, and whether the price differs for good and bad leavers. Without such a clause, there is no general right to be bought out.

Do we need a shareholder agreement if there are only two of us?

A two-shareholder company has particular reasons to have one. With two equal owners, neither can outvote the other, and the model articles say nothing about what happens if you disagree, if one of you wants to leave or if one of you dies. With unequal holdings, the larger shareholder can pass ordinary resolutions alone, including removing the other as a director. A short agreement dealing with deadlock, leavers, death and restrictions on selling shares covers the main risks for two owners.

Sources & further reading

• legislation.gov.uk — Companies Act 2006, section 168
• legislation.gov.uk — Companies Act 2006, section 283
• legislation.gov.uk — Companies (Model Articles) Regulations 2008, Schedule 1
• legislation.gov.uk — Companies Act 2006, section 994
• The Supreme Court — Cavendish Square Holding BV v Makdessi [2015] UKSC 67
• GOV.UK — Tax when you buy shares

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. AD Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).