For any start-up or growing business, a shareholders agreement is one of the most important documents you can have in place. Tailored articles of association may provide some protection, but they alone do not give rise to a breach of contract claim and may leave significant gaps. Without a shareholders agreement, it may not be possible to resolve conflicts which can escalate quickly and damage both the business and relationships.
We draft shareholders agreements for start-ups, scale-ups, entrepreneurs, investors, and directors across the UK. A well-structured shareholders agreement protects everyone involved, manages expectations, and signals to investors that the business is organised and well-governed.
FAQs
Yes. Articles of association are a public document filed at Companies House and cover only a limited range of matters. Breach of a provision of the articles means that the relevant matter is ultra vires and void. Usually it doesn’t give rise to a claim for breach of contract. A shareholders agreement is private, more detailed, and deals with issues that articles cannot address effectively, such as reserved matters, dispute resolution procedures, founder vesting, drag and tag along rights, and what happens when a shareholder wants to leave. Breach of the provisions of a shareholders’ agreement will usually give rise to a breach of contract claim. We strongly recommend a shareholders agreement for any company with more than one shareholder.
A drag along clause allows a specified majority of shareholders to require minority shareholders to sell their shares at the same price and on the same terms when the company is sold. This prevents a minority shareholder from blocking a sale that the majority want to proceed with. It is a standard provision in most shareholders agreements and protects the company's ability to achieve a clean exit.
A tag along clause gives minority shareholders the right to join a sale when a majority shareholder sells their shares, at the same price and on the same terms as the majority. It protects minority shareholders from being left behind when control of the company changes hands.
Reserved matters are decisions that require the consent of a specified percentage of shareholders before the company can act. They protect minority shareholders by giving them a say over significant decisions such as issuing new shares, taking on debt, changing the nature of the business, or selling material assets. We advise on the appropriate list of reserved matters for your business.
What happens when a founder leaves depends on what the shareholders agreement says, which is why getting it right from the start matters. Most well-drafted agreements include good leaver and bad leaver provisions. A good leaver typically retains their shares or receives fair value for some or all of them. A bad leaver may be required to sell at a discounted or nominal price. These provisions need careful consideration.