Founders & Owners

A shareholder agreement is a private contract between the shareholders of a company governing how the company is run, how decisions are made, and what happens when shareholders disagree, want to leave, or want to sell. Key provisions include: reserved matters requiring shareholder approval; share transfer restrictions (pre-emption rights, drag-along and tag-along rights); good and bad leaver provisions; dividend policy; deadlock resolution mechanisms; and non-compete obligations. If your company has more than one shareholder and no shareholder agreement, you are relying on default statutory rules and whatever the articles say — which is rarely enough when a dispute arises.

A well-drafted commercial contract should clearly cover: the exact legal identity of both parties; what each party is required to do, to what standard, and by when; how and when payment is made; what happens if one party fails to perform; how liability is limited or excluded; who owns any IP created under the contract; confidentiality obligations and their duration; the governing law and dispute resolution mechanism; and how the contract ends. Many SME contracts fail because of what they omit: limitation of liability clauses, IP ownership provisions, and clear termination triggers are the most frequently overlooked and the most expensive to litigate without.

A director's service agreement is the contract between a director and the company setting out the terms of the director's engagement: role, responsibilities, remuneration, notice periods, holiday entitlement, and restrictive covenants (non-compete, non-solicitation, non-dealing clauses that apply after the director leaves). For founder-directors, a service agreement formalises what is often an informal understanding. The restrictive covenants in a service agreement are often the most commercially significant element — they determine what the director can and cannot do after leaving and for how long. Covenants that go further than is reasonably necessary to protect a legitimate business interest will not be enforced.

The outcome depends heavily on whether there is a shareholder agreement and what it says. Without one, the default statutory position applies — majority shareholders can generally run the company as they see fit; minority shareholders have limited protections unless they can establish "unfair prejudice" under section 994 of the Companies Act 2006, which is a high bar and an expensive route. With a well-drafted shareholder agreement, the options are wider: reserved matters provisions require consensus on key decisions; deadlock mechanisms provide a path forward; and exit rights give minority shareholders a route out that does not depend on litigation. Taking advice at the first sign of meaningful shareholder tension almost always produces better outcomes than waiting.

A business sale or acquisition involves: heads of terms (summary of key commercial terms — structure, price, earn-out, conditions); due diligence (the buyer's investigation of financial, legal, tax, commercial and operational matters); negotiation of the sale and purchase agreement (including warranties, disclosure, indemnities, and limitations on claims); and completion and post-completion steps. The distinction between a share sale (buyer acquires the company and all its liabilities) and an asset sale (buyer picks the assets, leaves the liabilities) is one of the most important early decisions. Sellers generally prefer share sales; buyers often prefer asset sales.

An MBO is the acquisition of a business by its existing management team, typically funded by management equity, bank debt, and sometimes private equity. From a legal perspective an MBO involves: structuring the acquisition vehicle (usually a new holding company); negotiating the acquisition from the existing owner; documenting the management team's equity participation and governance rights; and dealing with financing arrangements. The conflict inherent in an MBO — you are simultaneously employees of the target and buyers of it — requires careful handling. Fiduciary duties to the target company continue until completion.

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Good governance for an SME means: clear decision-making authority (what the board decides, what shareholders must approve); regular board meetings with proper minutes; up-to-date statutory registers and Companies House filings; properly documented director appointments and service terms; and a shareholder agreement that reflects the actual commercial relationships between owners. Poor governance creates risk: disputes are harder to resolve without clear rules; director liability is harder to manage without proper records; investment and exit transactions are slower and more expensive when governance is untidy.

Before accepting investment: understand the term sheet fully — the economics (valuation, share class, preference rights, anti-dilution), governance provisions (board composition, investor reserved matters, information rights), and exit mechanisms (drag-along, tag-along, pre-emption) in the term sheet will be reflected in the investment documents; ensure your cap table is accurate and documented; confirm all IP created by founders, employees and contractors is properly assigned to the company; review any contracts with change of control provisions; and understand your dilution and the economic consequences of various exit scenarios. Negotiate the term sheet, not just the investment documents.

Unfair prejudice under section 994 of the Companies Act 2006 allows a shareholder to petition the court where the company's affairs are being conducted in a manner that is unfairly prejudicial to their interests. Common grounds include: exclusion from management in breach of a legitimate expectation; misappropriation of company assets by majority shareholders; excessive director remuneration at the expense of dividends; breach of the company's articles or a shareholder agreement; and deliberate diversion of business to a competing vehicle. The most common remedy is an order requiring the majority to buy out the minority at a fair value — usually without minority discount. Unfair prejudice proceedings are expensive and should be considered a serious litigation step rather than a first resort.