Shareholder agreement readiness check

What your result means

The exposure band counts the protections you are missing: nothing flagged is Low, one or two is Moderate, three to five is High, six or more is Severe. It is not a prediction. Plenty of companies run for a decade on the model articles and never need any of this, because nobody leaves, nobody dies and nobody falls out. The band measures what happens if one of those three does occur, which is the only situation any of these clauses exists for.

Read the missing list as questions the owners have not yet answered rather than documents you have failed to buy. Every entry has the default written beside it, and that default governs until you replace it. It is not a blank — it is a set of rules chosen by Parliament for companies in general, and it is rarely what these founders would have chosen if anyone had asked them on day one.

What to do next

The order matters more here than on any other check, because the document is the last step rather than the first.

1. Have the conversation before anyone drafts anything. What happens if one of us wants out in year two? What if one of us stops pulling their weight? What if one of us dies? Those three questions produce most of an agreement.
2. Deal with deadlock first if you are 50/50. It is the one gap that stops the company functioning altogether rather than merely costing money.
3. Then vesting and leaver terms. Both are straightforward to agree with someone before they hold shares and impossible to impose afterwards without their consent.
4. Look at the articles as well as the agreement. Transfer machinery that has to bind a future shareholder belongs in the articles; the private commercial promises belong in the agreement.
5. Fund whatever you agree about death. A cross-option is worth nothing if the survivors have no money to buy with, and life cover arranged at incorporation is usually far below what the shares are now worth.

What you get by default, and why it is not enough

A company incorporated online and left alone runs on the Companies Act 2006 and the unamended model articles. That default is a reasonable framework for a single owner and a poor one for two or more, because it is silent on almost everything founders fall out about.

Here is what the default actually gives you. A special resolution passed by 75% of the votes can amend the articles (ss.21 and 283). An ordinary resolution of more than half the votes can remove a director before the end of their term, on special notice, whatever any agreement with them says (s.168). Two qualifying persons are a quorum at a general meeting (s.318). Existing shareholders have a statutory right of pre-emption when the company issues new shares (s.561).

And here is what it does not give you: any right to buy out a shareholder who leaves, any distinction between a founder who leaves through ill health and one who leaves to compete, any way to break a tie, any way to force a minority to join a sale, any way for a minority to join one, and any control over who a fellow shareholder sells to.

The 50/50 trap

Two founders with half each and no deadlock mechanism is the most expensive structure in small company law. Neither can pass an ordinary resolution without the other, so the company cannot remove a director, approve a course of action or change anything at all once they disagree. There is no statutory casting vote.

What is left is litigation. A petition for unfair prejudice under s.994 of the Companies Act 2006 asks the court to order one shareholder to buy the other out, and is fact-heavy and expensive. A just and equitable winding-up petition under s.122(1)(g) of the Insolvency Act 1986 asks the court to end the company — which resolves the deadlock by destroying the thing being argued over. Both cost real money and take months. A two-line deadlock clause agreed at the start costs nothing.

Leavers and vesting

The single most common regret in early-stage companies is equity issued outright on day one to someone who left in month four. Nothing in company law claws it back. They keep the shares, they keep the dividends, and everyone who stayed spends the next decade growing the value of a stake belonging to someone who is not there.

Vesting solves it prospectively — typically over three or four years with a one-year cliff, so nothing vests if someone leaves in the first year. Leaver provisions solve it at the point of departure, by requiring the shares to be offered back at a price fixed by a mechanism agreed in advance. The two work together, and both are far easier to agree with someone who does not yet hold the shares.

The good leaver / bad leaver distinction is what stops a leaver clause being unfair. Someone leaving through illness and someone leaving to set up in competition should not be treated identically. Draft the bad leaver price as a genuine commercial term rather than a punishment — a price designed to hurt invites both a penalty argument and an unfair prejudice petition.

Drag, tag and pre-emption on transfer

Drag-along lets a defined majority force everyone else to sell on the same terms, which is what makes a clean 100% sale possible. Tag-along lets a minority join a sale by the majority on the same terms, which is what stops them being stranded alongside a new owner they did not choose. They protect opposite sides and normally appear together.

Pre-emption on transfer is different from the statutory pre-emption in s.561, and this confuses people constantly. Section 561 applies when the company issues new shares. It says nothing about a shareholder selling existing ones. Without a right of first refusal in the articles or the agreement, a shareholder can sell to whoever will buy — including a competitor. Model article 26 lets the directors refuse to register a transfer, but refusing to register is a blunt instrument that leaves the seller as the registered holder and everyone deadlocked.

Agreement or articles?

Both, usually. The articles are the company’s constitution, they are public at Companies House, they bind every shareholder including future ones, and they can be amended by a 75% special resolution. A shareholders’ agreement is a private contract between the people who sign it, it stays confidential, and it can require unanimity to change — which is precisely the protection a minority shareholder needs and cannot get from the articles alone. Transfer mechanics normally sit in the articles so they bind incoming holders; commercial promises sit in the agreement.

What it costs to get one in place

Buzz Legal drafts shareholders’ agreements on a fixed fee from £1,250 +VAT, and that includes the conversation about what you actually want to happen before anything is drafted. The conversation is the hard part; the document is the easy part. Set against the alternative, the £200 to £350 +VAT an hour commonly quoted for this work buys between roughly three and a half and six hours.

If what you need first is a view on the articles you already have, that is a contract review at £249 +VAT. If ownership questions keep arriving — an investor, an employee shareholder, an option scheme — the subscription starts at £49 +VAT a month. The fixed-fee work page lists the rest, and anything outside it is scoped and priced in writing before work starts.

Two limits, stated plainly. Buzz Legal Ltd is not a firm of solicitors and is not regulated by the SRA, so this work does not carry the SRA compensation fund and complaints about it do not go to the Legal Ombudsman. And if the fall-out has already happened — an unfair prejudice petition threatened, a director purportedly removed, solicitors instructed on the other side — this has stopped being drafting. It is a dispute, it is reserved work, and it goes to RHF Solicitors, authorised and regulated by the SRA (no. 324115). The tax treatment of any share structure is a question for your accountant rather than for this page.