Shareholders' agreement

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Shareholders' agreement

Without a shareholders agreement in place you are exposed to loss – and the better the business the larger the risk. Our expertise can help you limit risk because we tell you how to protect your investment.

We help shareholders and the businesses they invest into. Over the years we have looked at literally thousands of shareholders’ agreements for a range of private companies. We are familiar with many trading sectors such as services, technology, software, media, digital and retailing.

The shareholders’ agreement – what to look for

There are often competing interests. Our suggestions are tailored to your circumstances. We have set out a few of the top headlines to be consider for your shareholders’ agreement:

  • What happens if someone stops working with the company? Can they keep the shares – without a shareholders agreement all shares will be retained post termination of employment.
  • How will you value the shares? In a shareholders agreement there can be a variety of formulas for share valuation.
  • Can the sale of shares be blocked? Without any shareholders agreement a shareholder can refuse to sell and depending upon the size of shareholding this can block a sale.
  • How are minorities dealt with? Are the rights of minorities to be enhanced beyond that given to them under the Companies Act.


You may find it impossible or at best difficult to remove directors if you have not secured this power.  The shareholders should reserve rights to hire and fire directors as the position in standard articles often leaves little protection. In many cases the directors are also shareholders and conflicts of interest can erupt if the position has not been considered and addressed.

Avoiding conflict with directors

It pays to have considered before a dispute arises:

  • Which directors are required to be actively involved and who are the decision makers?
  • Who determines salary and bonuses?
  • Are there certain actions you need a power to veto?  Veto powers are possible and enforceable if you have set them out clearly in the shareholders agreement.

Using a shareholders’ agreement to monitor dilution

Your investment can be diluted without your approval if you have not taken steps to protect your position.  Directors and shareholders need to consider dilution carefully and weigh up preserving capital against using new share capital for funding.

Effective control of the share capital structure

Questions to consider include:

  • What level of approval is needed to approve new shareholders and on what terms?
  • Will there be special rights?
  • Should the existing shareholders have a right of first refusal to acquire shares?  Sometimes, it is not desirable to offer all new share issues to all shareholders which is the position at common law unless you carve out the right in the articles and or shareholders agreement.
  • What information can a shareholder demand?  In practice, rights under the Companies Act are very limited.  Additional information rights will need to be specifically drafted into the articles or shareholders’ agreement.


Investors who will be injecting money into a company will have their own very specific set of concerns. We can talk you through the best means of protecting your investment while encouraging the company to grow.  We can deal with:

De-risking under a shareholders’ agreement

The power to control the shareholder base to prevent the shares being acquired by the wrong people is valuable. Directors have the power to refuse a transfer but this may not suit if either the directors are not in harmony or approve transfers you disapprove of.  With a shareholders agreement steps can be taken to regulate the transfer of shares.

Fair value

You will have no way of securing a fair return on capital if you exit the business without a shareholders’ agreement or set of adapted articles.  The majority of shareholder disputes arise where a shareholder wants to exit before the whole business is sold off under a trade sale – private sale of shares.

The value to be paid on a private sale of shares is always an important question and an area we will always discuss.

Structuring the approach to determining fair value

There are many aspects we can deal with such as:

  • Setting out a pre-agreed formula for calculating the price – identify the value for which a share can be sold, when and to whom. We can deal specifically with discounts for minority interests either specifically catering for a discount or expressly stating there is no discount (depending upon whom we are acting for).
  • Dealing with disputes over the fair value to be paid – referral to an independent expert can resolve issues or it can be left in the hands of the company’s accountants.
  • Devising share classes which attract different rights of return on capital – it is not uncommon to see restrictions on capital value placed on prescribed classes of shares and enhanced values applied for other classes of shares especially if ratchets or milestones are reached.
  • Catering for procedures if there is a members’ voluntary winding up – set out how funds are to be applied.

Company buy back

It can be tax efficient for the company to buy back shares from a departing shareholder. The shares bought back are cancelled thereby increasing the percentage of shares held by existing shareholders.  The buy back is funded from distributable reserves.

It is possible for the Company to preserve the right to buy back shares in priority to the transfer of shares to other shareholders  which can be beneficial – but this right must be specifically reserved.

Drag along or tag along rights

If the majority of shareholders want to be sure that they can sell 100% of the business they can have rights to “drag along” minorities.  Drag along usually operates to ensure the minority shareholders dragged into the sale receive the same consideration as the majority.

Drag along rights will not exist unless you specifically include them in the shareholders’ agreement (or articles).

Tag along rights protect minority shareholders.  Tag along rights allow a minority shareholder to sell if a majority shareholder sells.  Again, you need specific drafting.

Shareholder disagreements

Shareholders do fall out and the problem can be acute if the shareholder is also a director.  The shareholders’ agreement can provide solutions which will deal with difficulties and keep the business on track.  Nobody thinks about shareholder disputes and disagreements until the situation has presented itself.

Once the dispute has started it is then often too late to resolve matters easily. With a shareholders’ agreement in place before the dispute airs the procedure to deal with almost all eventualities can be set out to avoid disruption.

Diverting profits

If you do not build in restrictions a shareholder may become involved with a competing business and divert profits or poach staff and or customers.  A shareholder does not owe any fiduciary rights to other shareholders.  There is only a fiduciary obligation placed on directors.

If the shares are valuable non-competes attached to the pay-out for shares can be more of a deterrent than non-competes attaching to the employment agreement.  We can address non-competes in the shareholders agreement in a way which can prove a workable deterrent.

Different types of shareholders

If you do not create different classes of shares you may find it more difficult to manage the payment of dividends without triggering tax risks.

Management of dividends

Dividend rights are best managed through creating different classes of shares.  With different classes of shares the directors can determine that each share receives a different dividend payment which can make an HMRC challenge easier to defend.

Creating flexibility

Often the provisions under the standard articles do not go far enough to promote flexibility between shareholders. The solution is to bolster the position in the shareholders agreement.

Using the shareholders’ agreement as a dividend policy

The shareholders’ agreement can set out a dividend policy and prescribe the quorum of directors required to approve a dividend as a safeguard.

A dividend policy needs to be carefully considered. Often owner managed companies use dividend waivers to increase the dividend pay-out to certain, often basic rate taxpayer shareholders.  There can be tax issues if HMRC suspect there is “value shifting” but the use of different classes of shares will help.

Retaining profits

If you want to retain profits for re-investment into the business you may not be able to control that. Disputes will arise between long term and short term views.  You will not have control unless the issue has been addressed and the means to control have been plotted in advance of investment.

Using the shareholders’ agreement to create put and call options over shares

A shareholders’ agreement gives the parties flexibility to create options over shares. We describe three of the common options below:

1 – Call option for the company to issue shares

Here, a shareholder is given the option to “call” on the company to issue further shares, i.e. create more shares for the benefit of the shareholder. Another variation of a call option is where the company or a shareholder(s) can call on another shareholder to buy more shares.  The circumstances in which the call can be exercised are set out in the shareholders’ agreement.

2 – Put option over shares held

With a put option a shareholder or the company can force a shareholder(s) to sell his shares. Like a call option over a shareholder’s shares, this option is usually subject to certain conditions. The key condition here is usually price, the fall back being fair value determined by an expert. We do value shares in private companies.

Benefits of a shareholders’ agreement in a jointly owned businesses

One of the most complex relationships to disentangle is two 50/50 joint owners of a company. Typically, each is a shareholder, a director and an employee. Each has different rights and responsibilities in each role.

Implications where there is no shareholders’ agreement in place

50/50 shareholders often think, wrongly, they do not need a shareholders’ agreement. But, i there is no shareholders’ agreement, then:

  • Who controls the company?
  • What do the employees do if one boss demands one thing and the other orders the opposite?
  • How can the split be managed?
  • What if one owner owns more shares than the other?
    • Can he take control?

Shareholders’ agreement track record

Our expertise is not just limited to drafting clauses.  We can deal with tax planning related to your shares, how to value your shares and if things go wrong we will deal with resolution of shareholder disputes.   Clients find the blend of legal, tax, valuation and commercial expertise useful as they know we can cover all the angles.

Drafting and negotiating a shareholders’ agreement for founders, minorities and investors is core business at Gannons. Over the years we have dealt with a great many situations across a wide range of sectors. Some recent cases include:

  • Set up the equity structure for a start up in digital media – we advised on the use of different classes of shares for founders and investors and implement bespoke articles and a shareholders agreement.
  • Reviewed existing articles and shareholders agreement for a technology business seeking EIS investment – we dealt with the requirements necessary EIS tax relief and included investor protection for the new investors subscribing for shares under EIS.
  • Advised an existing founder who was leaving an on-line brand retailer on how to negotiate a good deal for the price received for his shares with ideas on how the business could fund the cancellation of his shares tax efficiently via staging the payments.
  • Prepared the articles and shareholders agreement for a business where the equity was held 50:50 – the skill there was to propose a structure which avoided a deadlock situation which would stifle the business.
  • Advised the majority shareholder on a shareholders agreement to cater for directors and senior executives in a software business who were being awarded equity to incentive and motivate them to stay with the business.

The success of any business depends upon how a company is operated.  A tailored shareholders agreement in conjunction with suitable articles sets out the framework for operation.  It is often too late to leave the questions open until trouble is brewing.  No two businesses are identical as the shareholding power base varies and for that reason we take the time to understand the power base in order to advise on the best angles for your situation.