The question is never whether shareholders in a small company will disagree. They will — over strategy, spending, salaries, dividends, and who is doing what. The question is whether, when that happens, there is a document that tells you how to resolve it. Most founder-led businesses do not have one. When the dispute arrives, they find out what that absence actually costs.
What a Shareholder Agreement Is
A shareholder agreement is a private contract between the shareholders of a company — and usually the company itself — governing the relationship between the owners. Unlike the articles of association (a public document at Companies House), a shareholder agreement is private. It works alongside the articles, filling the commercial gaps that standard articles leave open.
What It Must Cover
Reserved Matters
The Companies Act 2006 sets out which decisions require shareholder approval. For most founder businesses, the statutory thresholds are not granular enough. A well-drafted shareholder agreement includes a list of "reserved matters" — decisions requiring unanimous shareholder consent or a specified supermajority regardless of what the articles say.
Reserved matters typically include: issuing new shares; taking on significant debt; selling material assets; entering contracts above a threshold value; changing the business's core activity; approving the annual budget; and changing founder-director remuneration.
Without reserved matters, a majority shareholder can make significant decisions without the minority's consent. This is one of the most common triggers for minority shareholder disputes.
Share Transfer Restrictions
Pre-emption rights require a selling shareholder to offer their shares to existing shareholders before selling to a third party — preventing a founder from selling to a competitor or unwanted investor without the others having first opportunity to buy.
Drag-along rights allow the majority to require the minority to sell their shares alongside them in a third-party sale on the same terms — preventing a minority shareholder from blocking an exit the majority wants.
Tag-along rights give minority shareholders the right to join a sale being made by the majority on the same terms — preventing the majority from selling their controlling stake at a premium while leaving the minority behind.
All three provisions work together to make exits manageable. Without them, a business sale can become a hostage situation.
Good Leaver / Bad Leaver Provisions
A bad leaver — someone who leaves within a vesting period, is dismissed for cause, or leaves in breach of their obligations — typically forfeits unvested shares or sells them at a significant discount, sometimes at cost or nominal value.
A good leaver — someone who leaves after a specified period, through redundancy, ill health, or other agreed circumstances — retains vested shares or sells at fair value.
The rationale: shares in an early-stage company represent future work, not just past investment. A founder who leaves on day one should not retain the same economic stake as one who stays for five years and builds the business.
Deadlock Mechanisms
What happens when two equal shareholders cannot agree? Without a deadlock mechanism: litigation, or the business grinds to a halt. A shareholder agreement should address this directly. Mechanisms include: a casting vote given to one named person or an independent third party; a "Russian roulette" provision (one party names a price, the other must buy or sell at it); a "Texas shoot-out" (both parties submit sealed bids, highest bidder buys); or an obligation to refer deadlock to mediation before either party can take legal action.
Dividend Policy
Without a shareholder agreement, the decision to pay dividends is a board decision. In a company where majority shareholders are also directors, this creates scope for the majority to extract value through salary while declining to pay dividends to a passive minority investor. A shareholder agreement can specify a minimum proportion of distributable profits to be paid as dividend.
Non-Compete and Non-Solicitation
A departing founder with knowledge of the business's pricing, strategy and key relationships is a competitive risk. A shareholder agreement should include post-departure covenants — non-compete, non-solicitation and non-dealing — for a specified period. These must be carefully calibrated: too wide in scope or duration, and courts will not enforce them.
What Happens Without One
The consequences of no shareholder agreement emerge at moments of stress: when a founder wants to leave; when an investor comes in; when there is a disagreement over a major decision; when a director is dismissed; when a third party makes an approach to buy the business. At each moment, the absence of a pre-agreed framework means every question becomes a negotiation between parties already in conflict.
The right time to prepare a shareholder agreement is before incorporation or immediately after — when relationships are good and commercial terms are easy to agree. The second-best time is now.
Bonsai Law drafts and advises on shareholder agreements for SMEs, founder-led businesses and investor-backed companies. If your company has more than one shareholder and no shareholder agreement, contact us.
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