Common questions
Is a shareholders' agreement legally required?
No. A company can run on its articles of association alone, and thousands do. The real question is what the default answers are when something happens, and the model articles are close to silent on the things owners actually fall out about: whether a departing founder keeps their shares, how a 50/50 disagreement gets broken, whether anyone can be made to sell, and who can block a major decision. Without an agreement, a founder who walks out in month six generally keeps their full stake for ever, and the people still working in the business build value for someone who left. That single fact is why most multi-owner companies eventually put one in place.
What is the difference between the articles and a shareholders' agreement?
The articles are the company's public constitution, filed at Companies House and readable by anyone, including competitors and prospective employees. A shareholders' agreement is a private contract between the shareholders and never appears on the register, which is why the commercially sensitive terms live there: leaver provisions, drag and tag rights, deadlock mechanisms, dividend policy, and what each owner is expected to contribute. The two have to be drafted to work together. A common and expensive failure is an off-the-shelf set of articles permitting a share transfer the new agreement was written to prevent, so whenever an agreement goes in, the articles get read alongside it and amended where they conflict.
When is the best time to put one in place?
Early, while everyone is aligned and nothing is in dispute. The terms of a shareholders' agreement are a negotiation, and the price of that negotiation is set by how much anyone has to lose at the time you have it. Agreeing that a founder who leaves in year one hands back most of their equity is an easy conversation before anyone has left and a nearly impossible one afterwards. The second-best time is now. Plenty of companies put one in years later, usually because an incoming investor or a new co-founder forces the question, and that works too — it is simply harder, slower and more expensive than it needed to be.
What happens to a shareholder's shares if they die?
Without provisions dealing with it, the shares pass under the shareholder's will, so the surviving owners can find themselves in business with a spouse, a child or a beneficiary who has no involvement in the company and no interest in running it. That person inherits the votes as well as the value. A shareholders' agreement can set a pre-agreed route: the remaining shareholders or the company buy the shares at a fair value on an agreed basis, often within a defined period. The usual companion is life insurance written so the money to fund that purchase actually exists, because without the funding a well-drafted buyout clause is a promise nobody can afford to keep.
Does a shareholders' agreement only protect the majority?
No, and it is often worth more to a minority. A shareholder with 20% has almost no power under the default rules: they cannot block an ordinary resolution, cannot force a dividend, and can be left behind if the majority sells. An agreement changes that with reserved matters — a defined list of significant decisions such as issuing new shares, taking on major borrowing or selling the business, which require a higher level of consent than a simple majority — and with tag-along rights letting a minority join a sale on the same terms. Draw the reserved list carefully: too long and nothing gets decided, too short and it protects nobody.
We are 50/50 and we cannot agree. What does an agreement do about that?
It provides a deadlock mechanism, which is the main reason 50/50 companies need one most and have one least. Without it, an even split with no casting vote means no resolution passes, the company stops making decisions, and the remaining routes are a negotiated buyout, an unfair prejudice petition or a just and equitable winding-up petition — ending the company in order to resolve the argument. Agreements handle it with a chairman's casting vote, an escalation to mediation, or a buy-sell mechanism where one owner names a price and the other chooses whether to buy or sell at it. None of them are pleasant. All of them beat paralysis.
What does one cost, and does it need a solicitor?
A shareholder agreement starts at £1,250 +VAT as a fixed-fee job, and that includes a read-through of your existing articles to check the two documents do not contradict each other. Drafting it is non-reserved work, so a solicitor is not legally required. Two things sit outside the fee and are worth planning for: tax advice on share structures or anything needing HMRC clearance, which goes to your accountant, and a formal valuation of the company, which is a separate exercise. One point of principle before you start — we act for the company, not for individual shareholders, so each owner should take their own advice before signing, and an already-adversarial shareholder dispute goes to RHF Solicitors.