What should be included in a shareholders’ agreement?

We’ve written separately to explain what a shareholders’ agreement is and when it’s appropriate to have one in place. This article sets out some of the practicalities of putting a shareholders’ agreement in place and details the usual provisions you should expect to find in a standard agreement.

We’ve also prepared a template shareholders’ agreement incorporating all these standard provisions, which you can purchase and download.

Does everyone have to sign a shareholders’ agreement?

A shareholder cannot be compelled to sign a shareholders’ agreement – i.e. each shareholder should enter into it voluntarily. The only exception to this rule is a deed of adherence (see below) whereby new shareholders agree to become bound by a pre-existing shareholders’ agreement.

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Sometimes it is neither appropriate nor necessary for a shareholders’ agreement to be signed by every shareholder. For instance, a shareholders’ agreement may cover just voting rights and only need to be signed by members of the same family to ensure control is retained by one particular member of that family.

Is there anything that must be included in a shareholders’ agreement?

There is no requirement for a shareholders’ agreement to contain particular information or always deal with a particular matter.   Indeed, a shareholders’ agreement can cover a whole variety of issues or just one.

There may be a very specific matter which one or more particular shareholders would want to see included that would be unique to their situation.   Provided that this will not hinder the directors promoting the best interests of the company then it should be possible to draft a clause specifically to address their concern.  Other signatories to the agreement ought to be advised that a specific and special provision has been included in the agreement.

What is a deed of adherence?

Any shareholders’ agreement would quickly become unworkable and worthless if any new shareholder did not become bound by the same agreement that the original shareholders were still bound by.  So, in order to make sure all new shareholders adhere to the original agreement, the shareholders’ agreement will typically contain a provision requiring any new shareholder to sign a deed of adherence (and thereby become a party to the shareholders’ agreement) before any transfer or allotment is made.

Which takes precedence: the articles of association or a shareholders’ agreement?

If the shareholder’s agreement and articles of association have been properly prepared there should not be any conflict between their respective provisions.  However, if a conflict does arise then the articles will generally prevail insofar as the conflicting provision relates to an obligation of the company.  So, provided that the obligations of the company are not being compromised then the provisions of any shareholder’s agreement will prevail as between the shareholders.

Is there a template shareholders’ agreement I can download?

To help you we have prepared a simple shareholders’ agreement (which we call the Inform Direct simple shareholders’ agreement or ‘IDSSA’ for short). This is available to purchase and download. It has been drafted by a top 100 law firm to be used by the directors/shareholders of a private company limited by shares. If you are unsure of whether this agreement meets your needs or the implications of any of the provisions we would encourage you to take legal advice in drawing up your own agreement rather then using this precedent since we cannot advise you should you wish to change any of the terms therein.

This template shareholders’ agreement is not appropriate for two shareholders both holding 50% of the shares. In this situation there needs to be a detailed provision for resolving any deadlock and this requires specialist drafting. Each party should take their own legal advice before entering into any such agreement.

While each shareholders’ agreement will be specific to a particular company there are certain provisions which are usual to include. We have set them out below and explained the approach adopted in our shareholders’ agreement template:

1 Directors and board meetings

A shareholders’ agreement will often state how often a board should meet. IDSSA provides for at least quarterly meetings. Further, it is quite common that a shareholders’ agreement will provide for additional named directors to be appointed. Their appointment is usually made once the shareholder agreement is signed.

2 Reserved matters

A shareholders’ agreement will often set out things which the company should not do without first getting the approval of all the signatories. By having an agreed list of reserved matters shareholders have a chance to veto certain transactions if they feel they are going to be prejudicial to their investment in the company. Most items reserved are things which a board of directors (i.e. not shareholders) would otherwise have jurisdiction to do without reference to the shareholders. Accordingly, a balance needs to be struck since if the list of reserved matters is too long it could hamper the daily management of the company.

Our shareholders’ agreement template lists all the items commonly reserved including: creating charges, borrowing, making loans, giving guarantees, changing the share capital, paying dividends, acquiring/disposing of particular assets, changing the memorandum & articles of association or voluntarily winding the company up. Do make sure that nothing included will restrict the effective management of the company.

3 Guarantees and indemnities

When a company borrows money the lender will often ask the shareholders to give a guarantee. (Note: entering into a loan agreement will usually be a reserved matter.) Assuming that all signatories have consented to the company entering into the loan agreement the shareholders will want to limit their liability in proportion to their shareholding. So if there were 100 shares in issue and one shareholder had 10 shares and the other 90 their liability to the bank would be 90/10 with the owner of the 90 shares assuming 90% of the liability. Where possible the shareholders should avoid giving a joint and several guarantee since their ultimate liability could be out of all proportion to their stake in the company.

4 Limits on variation

IDSSA provides that it can only be varied by the written agreement of all parties.

5 Deed of adherence

Our template shareholders’ agreement includes a standard deed of adherence as one of its schedules.

6 Share capital and share transfers

Dealing with share transfers is often the main component of any shareholders’ agreement.

IDSSA requires that the issued share capital position of the company is recorded as at the date the shareholders’ agreement is signed. It is important to do this correctly since one of the key matters reserved is a prohibition on any change to the share capital of the company. This means that the directors cannot issue new shares or convert existing shares into a new class (perhaps with a greater dividend entitlement) without all signatories agreeing to the change

IDSSA contains fairly standard pre-emption provisions concerning share transfers which give the existing shareholders first refusal to purchase any shares which come up for sale in proportion to their existing holding as well as controlling who else can become a shareholder. There are also deemed transfer provisions so that a person has to offer their shares for sale if they stand down as a director or die. Lastly, there are drag (compelling minority shareholders to accept an offer from a third party to purchase the company if at least 75% accept the offer) and tag (entitling minority shareholders to participate in any sale of the company at the same time and for the same price as the majority shareholders) provisions.

The Inform Direct Standard Shareholders’ agreement (IDSSA) does not cover the below items:

1 The need for a business plan/approval

Often shareholders will invest in a new venture when the business plan has not been fully formulated. When this is the case a shareholders agreement will require the directors to get ‘sign-off’ from all the shareholders on the finished or any change to the business plan.

2 Devoting time to business

A shareholder agreement can be a way to give comfort to a shareholder who is not a director that another shareholder who is also a director will devote sufficient time to the business.  This can be very subjective and so is not a provision within IDSSA. If a provision requiring someone to devote their time is appropriate we suggest you take specific legal advice to draw up a suitable clause.

3 Competition and restrictive covenants

A shareholder agreement can contain limits on, say, the geographical area that the company can operate as well as restrictive covenants preventing a shareholder setting up in competition to the company. These types of provisions are potentially very important and if they are likely to be applicable we suggest you take specific legal advice to draw up a shareholders’ agreement to cater for them.

What happens if a term of the shareholders’ agreement is breached?

Having put a shareholders’ agreement in place – usually best done at the same time the company is formed – it is hoped that each signatory will observe all the terms. Sometimes, however, either wilfully or negligently, one or more provision is breached. When this happens the party who has suffered loss may have a right to claim damages but very often the act complained of e.g. allotment of new shares will be perfectly valid and remain binding on the company and not capable of being challenged unless the company has also acted outside the provisions of its articles of association or legal requirements.


All companies must maintain up to date company records and file documents with Companies House. Inform Direct is the perfect tool to help you easily keep everything up to date.


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