What is a shareholders’ agreement, and do you need one?

A shareholders’ agreement is an important document for business owners in the UK to understand, particularly those running a limited company, who have shareholders within that company.

This guide explains what’s included in a shareholders’ agreement, how it differs from the articles, and when to set one up.

What is a shareholders’ agreement in the UK?

A shareholders’ agreement (SHA) is a private contract entered into by the shareholders of a company. It governs how the company is run and how shareholders relate to each other. In practice, an SHA will clarify each owner’s rights and responsibilities, the company’s objectives, and the process for making major decisions – such as appointing directors or issuing new shares.

• Company shares – paid, unpaid and partly paid
• Why do companies use multiple share classes?
• Pre-emption rights – the key to maintaining your shareholdings

Whether you’re starting a company with co-founders, investing in an existing business, or running a family-owned firm, a shareholders’ agreement helps protect everyone’s interests and avoid disagreements. It does this by spelling out in advance what happens in common scenarios – such as if someone wants to sell shares or if the company needs extra funding – so that “things go wrong” clauses are already agreed. For example, it might spell out how disputes will be resolved, or define “good leaver”/“bad leaver” exit provisions. An SHA helps formalise expectations and provides a clear roadmap for running the business smoothly.

This agreement complements, but does not supersede, the company’s articles of association. The articles are a mandatory public document (filed at Companies House) setting out basic rules of governance. By contrast, a shareholders’ agreement is kept confidential between the parties and can include bespoke rules not covered by the articles. We cover the key differences in more detail later on.

Why should you have a shareholders’ agreement?

A shareholders’ agreement is not required by law for private UK companies, but it is strongly recommended when there is more than one owner. In a sole tradership or single-person company, there are no shareholders to disagree with, so an SHA isn’t required. But as soon as you have two or more shareholders, it’s wise to have a clear agreement to:

Prevent disputes

By agreeing rules upfront, you reduce the chance of conflicts between owners. If disagreements do arise, the SHA provides a process (like mediation or arbitration) rather than having to go to court.

Protect minority interests

Minority shareholders (those holding a smaller percentage of shares) often have little say in day-to-day decisions. A good SHA can give them certain veto rights (for example, requiring all shareholders’ consent before issuing new shares). It can also include tag-along rights, allowing them to join a sale of shares by majority owners on the same terms.

Protect majority interests

Majority shareholders (those with controlling stakes) can also include drag-along clauses. This allows a majority owner to force a sale on any minority owners in certain situations (such as when selling the entire company), ensuring a smooth exit for all.

Define roles and exits

The SHA can tie share ownership to employment (forcing a person to sell their shares if they leave the company) and lay out what happens on death, retirement or dismissal of a shareholder. This avoids uncertainty about who can keep their shares.

Retain confidentiality

Because the SHA is private, it can contain commercially sensitive details (like detailed financial arrangements) that you may not want published in the articles.

When should I set up a shareholders’ agreement?

The best time to create a shareholders’ agreement is at the formation of your company or as soon as a second shareholder comes on board. Drawing it up early (even if you are just a couple of founders) means you agree to the rules from the start and avoid disputes later.

If your company is already running without an SHA, don’t worry – it’s never too late. A good opportunity to introduce one is when a new investor or partner joins the business. At that point you can formalise terms for all shareholders together. In fact, many startups leave their SHA until after initial funding rounds so they can negotiate it in line with investment deals.

Whether you start it yourself or hire help, keep in mind that there’s no legal requirement to use a lawyer – but professional advice can be very valuable. Our Full Company Secretary Service (FCSS) or a UK solicitor/accountant can draft and manage the agreement, ensuring it aligns with your company’s articles and the Companies Act. Even though this has an upfront cost, it often pays off by preventing costly conflicts later.

Common scenarios where an SHA helps

There are some common scenarios where an SHA will be vital for your situation.

Examples could include:

• Bringing on a new investor or co-founder (to set funding and exit terms upfront)
• Resolving family or partner disputes
• Planning for a future sale or IPO
• Dealing with a shareholder’s departure

In each case, having a pre-agreed SHA can save time, money and stress later. It ensures everyone knows where they stand, and their place in the company is legally confirmed.

Shareholders’ agreement vs articles of association

While both shareholders’ agreements and articles of association set company rules, there are key distinctions:

Legal status

Articles of association are required by law for every company. They form part of the company’s constitution and must comply with the Companies Act 2006. A shareholders’ agreement is a voluntary, private contract between shareholders.

Public vs private

Articles are filed at Companies House and can be viewed by anyone. A shareholders’ agreement is kept confidential between the parties. This privacy allows inclusion of sensitive commercial terms (e.g. specific funding arrangements or bonus rules) without public disclosure.

Content flexibility

Articles contain certain mandatory provisions (like share classes, director rules) set by statute. They often use standard or “model” articles by default. You can fully tailor an SHA to your needs – there is no standard form – so it can cover special clauses on voting, share sales, dispute resolution, etc.

Approval thresholds

Changing the articles typically only needs a 75% majority vote. By contrast, a shareholders’ agreement often requires unanimous consent of all shareholders to be amended. This means any change in the SHA reflects the agreement of everyone involved, giving all owners more control over the process.

Scope

Articles focus on the company–shareholder relationship (e.g. how directors are appointed, share types) as a matter of corporate law. Shareholders’ agreements focus on shareholder–shareholder relationships. For instance, what happens if a shareholder wants to sell their shares, or how profits are shared. They bridge gaps left by the articles, reducing the risk of disputes.

How does a shareholders’ agreement protect minority and majority shareholders?

Typically, majority shareholders (with more shares) control most decisions. Minority shareholders (with smaller stakes) can feel vulnerable, especially in a private company with only a few owners. A well-drafted shareholders’ agreement can level the playing field.

Minority protection

The SHA can specify that certain critical decisions require the consent of all shareholders, not just a simple majority. This might include hiring or firing directors, taking on large loans, or issuing new shares.

For example, an SHA can prevent the issuance of new shares without unanimous consent, thereby protecting minority shareholders from dilution. Tag-along clauses also protect minorities by allowing them to “tag along” when majority owners sell their shares, so they’re not left holding minority stakes in a new ownership structure.

Majority protection

Majority shareholders can also ensure their exit strategies. A common feature is a drag-along clause: if a buyer wants 100% of the company, majority owners can compel minority owners to sell on the same terms. This avoids a deadlock where minority owners block a lucrative sale.

Additionally, the SHA can prevent minority shareholders (who are often directors or key employees) from joining or forming a competing business, thereby safeguarding the company’s assets and expertise.

Overall, the SHA’s goal is to protect all parties. By explicitly granting certain rights (like vetoes or information rights) to minority shareholders, it ensures they aren’t steamrolled in key matters. At the same time, clauses like drag-along protect majority owners’ ability to exit or make decisions. In effect, the SHA outlines each side’s safeguards, providing everyone with a clear understanding of how power and profits are shared.

How to create a shareholders’ agreement

A step-by-step guide:

1. List key issues and terms

Start by discussing with co-owners what matters most:

• How will shares be allocated?
• What decisions require unanimous vs majority approval?
• Will there be different share classes with different rights?
• How will disputes be resolved?

Common clauses to include in a shareholders’ agreement are:

• Voting rights
• Dividend policy
• Share transfer rules (including pre-emption/first-refusal rights),
• Exit/valuation mechanics
• Deadlock-breakers

Don’t forget basics like what the company does, who will be bank signatories and who will be auditors. Some agreements cover operational details too, so make sure these are included if necessary.

2. Choose a drafting approach

You can hire a solicitor or use an online template. If using a template, ensure it’s UK-specific and up to date. There are many free or paid templates online, but “they’re not a one-size-fits-all solution”. The SHA must reflect your unique situation. A longer, thorough document is usually best. Ensure the language is clear and concise – avoid using legal jargon that may cause confusion.

3. Ensure compliance

The agreement must align with UK law and your articles. For example, you cannot write anything that breaks the Companies Act. Have the draft reviewed so it doesn’t conflict with statutory requirements or your company’s articles of association.

4. Get everyone to sign

A shareholders’ agreement only works if all relevant shareholders formally sign it. This binding signature ensures that the terms apply to everyone. If new shareholders join later, they should sign a deed of adherence to be bound by the existing SHA.

5. Store it safely

Because the SHA is confidential, it doesn’t get filed at Companies House. Keep copies with your legal documents and provide copies to each shareholder’s lawyer. Review it regularly – especially when major events happen (new funding, shareholder changes, new laws).

What are the risks of not having a shareholders’ agreement?

Without a shareholders’ agreement, a company must rely on its articles of association and general company law to resolve disputes. This can be risky: defaults and disagreements may spiral without agreed solutions.

For example, if a shareholder wants to exit or if major strategic issues arise (like a big investment or a change in management), there is no predefined process. Disputes can end up in court or even force a company to wind up, which is costly and slow.

Minority owners are especially vulnerable without an SHA, as they must rely on statutory rights – which can be hard to enforce – or hope the majority acts fairly. Majority owners lose nothing from having an SHA (since they usually set the deal terms), but everyone gains the clarity of knowing what will happen in difficult situations.

In practice, companies without SHAs often face stalemates or conflicts. Skipping a shareholders’ agreement means avoiding a safety net. It leaves fundamental questions (Who can sell shares? Who makes big decisions? What if a shareholder leaves?) unanswered, which can damage trust and result in costly consequences if things go wrong.

Ready to protect your business?

A shareholders’ agreement is your protection against the unexpected. It ensures everyone knows the rules and has agreed to them. If you’re starting or growing a UK company with more than one owner, setting up an SHA is a smart move.

Ready to protect your business with a shareholders’ agreement? At Quality Company Formations, we have the services and expertise you need to start a business confidently and remain compliant.