Shareholders' agreements for owners who keep a share

If you've sold part of your company, or you're about to, you'll soon own it with someone else. You might still run it day to day, or you might have stepped back to a seat on the board. Either way, the price was only half of the deal. The other half is the shareholders' agreement, which sets out how the two of you will own the business from here.

Our guide to selling part of your business explains what the percentages mean for voting. This guide goes through the agreement itself, clause by clause, from the side of an owner who keeps a share, usually the smaller one.

What a shareholders' agreement is for

A shareholders' agreement is a private contract between some or all of a company's shareholders. It sits alongside the articles of association, which are the company's own rulebook. Every company has articles. A shareholders' agreement is optional, and it binds only the people who sign it, so anyone who becomes a shareholder later has to sign up to it before it binds them.

Many small companies run on the model articles, the standard set published by the government, which apply automatically if a company doesn't register its own. They were written as a default, and they're silent on most of what a co-owner cares about. They give no right of first refusal when another shareholder sells, and set no terms for the shares of someone who leaves. Those have to be written in, in the agreement or in new articles.

How the agreement sits with the articles

The two documents work differently, and that decides what goes where.

A company that doesn't use the model articles unchanged has to register its own articles, and must send Companies House a copy of any amended articles within 15 days. Anyone can look at a company's filed documents online for free. A shareholders' agreement normally stays private. The exception is an agreement signed by all the shareholders that does something which would otherwise need a special resolution. That has to be filed within 15 days too, so solicitors usually draft around it.

How each document is changed is the reason an owner with a smaller share often wants their protections in the agreement. A shareholder with 75% of the votes can change the articles without you, unless the articles protect a provision with stricter rules, which is called entrenchment. Nobody can change a contract you've signed without your consent. The agreement can also say that it wins between you if the two documents ever conflict.

Decisions that need your agreement

Under the model articles, the directors manage the business and can use all of the company's powers. Shareholders can only tell them what to do by special resolution. So if your co-owner controls the board, they can make most decisions without you, including some that change what your shares are worth.

The usual answer is a list of reserved matters, decisions that need the consent of particular shareholders, set out in a schedule to the agreement. For an owner who keeps a share, the list might include these.

• Borrowing, or giving guarantees or security, above an agreed amount.
• Issuing new shares, or anything else that would reduce your percentage.
• Selling the business or a large asset, or buying another business.
• Changing the articles, or changing what the business does.
• Pay and bonuses for directors, including your co-owner's.
• Contracts between the company and your co-owner, or businesses they own.
• Management charges paid to your co-owner's own company.
• Approving the annual budget, and spending well outside it.
• Starting or settling a large legal claim, or putting the company into liquidation.

A list that's too long stops the business working, and someone who has bought part of a company will expect to run it without asking permission every week. Money limits help. A new van shouldn't need your consent, but a new loan of £250,000 probably should.

A seat on the board matters as much as the list. Under the model articles, directors are appointed by ordinary resolution or by the existing directors, so the majority decides who sits on the board. The agreement can give you the right to appoint a director, often yourself. The Companies Act still lets shareholders remove any director by ordinary resolution, whatever the director's own agreement with the company says, so ask your solicitor how the articles and the agreement will protect that seat.

The information you're entitled to

The law gives shareholders less information than many owners expect. Every shareholder must be sent the annual accounts and reports, and can inspect the minutes of shareholders' meetings and the register of members. There's no legal right to monthly figures or board papers.

If you're not a director, the agreement is where you get those. It might give you the following.

• Monthly management accounts within an agreed number of days of each month end.
• The annual budget, before the year it covers starts.
• Prompt notice of anything serious, such as a large claim or the loss of a big customer.
• The right to look at the books and records, on reasonable notice.

Dividends and what the company pays out

Under the model articles, shareholders declare dividends by ordinary resolution, but never more than the directors recommend, and the directors can pay interim dividends on their own. A company can only pay dividends out of profits available for the purpose. In practice, the board decides.

That leaves an owner who isn't on the board with no way to make the company pay out its profit. Meanwhile a co-owner who works in the business is paid a salary, and may be paid management charges through their own company. If the income from your shares matters to you, agree a dividend policy. One approach is to pay out an agreed share of each year's profit after tax, unless the business needs the cash or a lender says no. Cap any management charges at the same time.

Transfers and first refusal

New shares

With some exceptions, section 561 of the Companies Act 2006 says a company that issues new ordinary shares must first offer them to its existing ordinary shareholders, in proportion to what they already hold. This is called pre-emption, and it means your percentage can't be reduced without you having the chance to keep it. A private company can switch it off in its articles, though. Where there's only one class of shares, the directors can also be given power to issue shares without it, by the articles or by special resolution. Check whether your articles do either, and make any issue of new shares a reserved matter.

Existing shares

Pre-emption under the Act only covers new shares. When a shareholder sells shares they already own, the model articles give the others no right of first refusal, though the directors can refuse to register the transfer. You'll probably want more say than that. The agreement, and usually the articles too, can require a shareholder who wants to sell to offer the shares to the others first, at a price they agree or one set by an independent valuer. It can also allow some transfers freely, such as to a family trust or a holding company, and stop anyone selling at all for an agreed period.

Two more transfer rights matter when the whole company is sold. If your co-owner holds most of the shares, a drag-along is how they'll deliver all of the company to a buyer one day, and a tag-along is your protection if they sell their shares without you.

If you stop working in the business

Agreements often say that a shareholder who stops working in the business must sell their shares, at a price that depends on why they left. A good leaver, such as someone who retires or falls ill, is usually paid full value. A bad leaver, such as someone who resigns early or is dismissed for misconduct, may get much less.

If you're staying on after a part sale, these clauses apply to you. Check that retiring after the agreed handover counts as leaving well, and so does being dismissed without good reason, since your co-owner may control the board. Check too whether full value means a share of the whole, or something less because your shares don't control the company.

When you can't agree

Deadlock is most likely when you each hold half, but a long list of reserved matters can cause it too. The model articles give whoever chairs a board meeting a casting vote, which in a 50/50 company hands control to the chair, so it's often removed. Then you need another way to settle things.

Many agreements set out a ladder. A disputed decision goes first to a meeting of the shareholders, then to mediation. If that fails, a buy-sell clause can end it. One owner names a price per share, and the other must either buy at that price or sell at it. Because the person naming the price might end up on either side, they have a reason to name a fair one. It favours whoever can raise money more easily, though, so some agreements use a price set by an independent valuer instead, or require the whole company to be put up for sale. Without any of these, the routes left are slow and expensive, and can end in court.

How you'll sell the rest

An owner who keeps a share usually wants to sell it one day, and someone who buys part of a company usually wants all of it in the end. The agreement is the place to fix how that will happen, while you're getting on. These are the main terms.

• A put option. This lets you require your co-owner to buy your remaining shares, usually within an agreed window of dates.
• A call option. This lets them require you to sell. Make sure its window suits you as well as them.
• The price. A formula agreed now, for example based on the average profit of the two years before the option is used, with an independent valuer if you can't agree the figures.
• Any discount. A holding that doesn't control the company can be valued at less per share. Say whether that applies to yours.
• Payment. All at once or in instalments, and if it's in instalments, what security you get for the rest.

Our guide to how to value a business explains how buyers work out a price from profit, which is the starting point for any formula.

Getting the agreement right

The main points belong in the heads of terms, before anyone spends money on drafting, because they're much harder to win once the price is agreed. Use your own solicitor, not one shared with the buyer. Ask your accountant to read the leaver and exit clauses too, since the way your shares are bought later affects your tax. Then keep the signed agreement somewhere you'll find it. Most of these clauses only matter years later.