Starting or running a business with co-founders or investors? Then you need a shareholders’ agreement. It’s one of those documents that many businesses put off—until they wish they hadn’t.
A well-drafted shareholders’ agreement can mean the difference between a smoothly run business and a legal and financial nightmare if disagreements arise. Yet many SMEs and start-ups either:
- Have no agreement at all,
- Assume their company’s Articles of Association will cover everything, or
- Have a shareholders’ agreement that has not been updated to reflect changes in the company.
Sound familiar? If so, let’s talk about why this could be a huge risk and how a tailored shareholders’ agreement can protect your business.
1. What is a Shareholders’ Agreement and Why Does It Matter?
A shareholders’ agreement is a legally binding contract between a company’s shareholders that governs how the business is run, how decisions are made, and what happens if someone wants to leave or sell their shares.
1.1. Avoiding Disputes and Uncertainty
Even the best business relationships can hit rough patches. A shareholders’ agreement provides clarity and certainty on issues like:
- What happens if a shareholder wants to leave?
- How decisions are made and what requires unanimous approval.
- How disputes are resolved.
Without one, disagreements can escalate, putting your business at risk.
1.2. Protecting Minority and Majority Shareholders
A well-drafted agreement balances the rights of both majority and minority shareholders, ensuring no one is unfairly squeezed out or left without a say in major business decisions.
1.3. Defining Exit Strategies
What happens if a shareholder:
- Wants to sell their shares?
- Becomes ill or incapacitated?
- Passes away?
Without clear provisions, these situations can lead to uncertainty, business disruption, or shares ending up in the wrong hands.
1.4. Removing a Shareholder Can Be Costly and Difficult
Many business owners assume that if a shareholder is also a director and/or employee, they can simply be removed from the company if things go wrong. Unfortunately, this isn’t the case. Even if a shareholder is dismissed as a director or employee, they still retain their shares unless an agreement states otherwise.
Without a shareholders’ agreement outlining how shares should be transferred or bought back in such situations, removing a shareholder can become costly, time-consuming, and legally complex. Shareholder disputes are often stressful and expensive, with legal battles draining company resources and damaging the business’s reputation. A well-drafted agreement can include clear exit provisions to avoid these pitfalls.
2. Key Elements a Shareholders’ Agreement Should Cover
A shareholders’ agreement isn’t just about setting out ownership percentages—it should also address:
2.1. Decision-Making & Control
Who gets to make key decisions, and what requires unanimous agreement? Your agreement should clearly outline:
- Who has voting rights and how votes are weighted.
- What decisions require a special majority (such as issuing new shares or changing the business model).
2.2. Restrictions on Share Transfers
To prevent shares from falling into the wrong hands, a shareholders’ agreement should include:
- Pre-emption rights – giving existing shareholders the right to buy shares before they’re offered to outsiders.
- Drag-along and tag-along rights – protecting minority shareholders in the event of a sale.
2.3. Roles, Responsibilities, and Restrictions
Clarifying shareholder responsibilities can help avoid misunderstandings and disputes. Your agreement can also include:
- Non-compete clauses to stop departing shareholders from setting up a rival business.
- Restrictions on selling shares to competitors.
2.4. Protecting Intellectual Property (IP) and Confidential Information
Many businesses rely on intellectual property, whether it’s branding, software, or creative assets. Without a clear agreement, disputes over IP ownership can arise if a shareholder leaves or the business pivots. A shareholders’ agreement can:
- Require the company to maintain a register of all intellectual property, detailing ownership, protection steps, and associated costs.
- Ensure the company takes all reasonable steps to protect and renew patents, registered designs, trademarks, and other applications to keep them valid and enforceable.
- Clarify who owns IP developed within the company and ensure that shareholders cannot claim ownership of company assets upon exit.
- Protect confidential business information by requiring all shareholders to take reasonable steps to maintain its confidentiality and prevent unauthorised disclosures.
3. Why You Should Get Your Shareholders’ Agreement Reviewed
If you already have a shareholders’ agreement, that’s great—but when was the last time it was reviewed? Business priorities change, and your agreement needs to evolve too.
3.1. Does It Still Reflect Your Business Goals?
What worked when you started the business might not make sense now. A legal review ensures your agreement stays aligned with your company’s growth and strategy.
3.2. Are You Compliant with the Latest Laws?
UK company law changes frequently. A review ensures your agreement remains legally enforceable and doesn’t leave you exposed.
3.3. Are You Fully Protected?
A generic template may not cover all the specifics of your business, leaving gaps in protection. A review ensures your agreement truly safeguards your interests.
The Bottom Line
If your business has multiple shareholders and no shareholders’ agreement (or an outdated one), it’s time to take action.
A properly drafted and reviewed shareholders’ agreement isn’t just a legal document—it’s a crucial tool to protect your business, avoid disputes, and provide long-term stability.
If you want to make sure your shareholders’ agreement works for you and your business, let’s have a chat. You can email us at National Business Register on info@nbrg.co.uk or call 0800 069 9090.
