At a certain point in your company’s growth, for example when your team starts to grow, you’re preparing for your first funding round, or when equity starts changing hands, you need to pause and get your legal foundations in order. That often means putting certain basic legal documents in place, and making sure your shareholder relationships are clearly documented and legally sound.
Enter the shareholders’ agreement.
This article isn’t about the basics. If you’re reading this, you probably already know what a shareholders’ agreement is and why it matters. You’ve granted equity to a co-founder, advisor or early investor, and now you want to ensure the terms of that arrangement are clear, enforceable, and aligned with your long-term plans.
Instead of explaining what a shareholders’ agreement is, we’ll explore what a good one should include, why template agreements often fall short, and how tailored legal advice can save you from serious headaches later on.
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What to include in a shareholders’ agreement
Once you're ready to put a shareholders’ agreement in place, what exactly should it cover?
A well-drafted agreement doesn't just set out legal formalities, it builds the rules of engagement for everyone involved in the business.
Here are the main areas you’ll need to consider, and why each one matters:
Decision-making and the board of directors
The agreement should clearly define how strategic decisions are made, and who gets a say.
For example, do certain matters (such as hiring senior staff, raising investment, or selling the company) require unanimous approval or a supermajority? How are directors appointed and removed, and how do shareholder consent interact with board authority?
Getting these areas clear helps to avoid gridlock and ensure the business can run effectively, even when shareholders don’t all see eye to eye.
Shares: classes, rights and transfers
If you’re issuing different classes of shares (e.g. ordinary, preference, non-voting), the agreement should outline the rights attached to each, such as dividends, voting power, and priority on exit.
It should also set out rules around issuing new shares and what happens if a shareholder wants to sell, including pre-emption rights and drag-along/tag-along clauses. This protects existing shareholders from unwanted dilution or being stuck with incompatible co-owners.
Capital contributions and funding
A shareholders’ agreement can specify how future funding rounds will be handled, for example, whether shareholders must contribute further capital if needed, or what happens if they don’t. This helps avoid tension later, particularly if not all shareholders have the same appetite or capacity for risk.
Dispute resolution and exits
Even among the most aligned founders, disagreements happen. A good agreement builds in a mechanism for resolving disputes before they damage the company, such as escalation processes, mediation, or buy-out clauses. You’ll also want to plan for what happens if a shareholder wants to leave or becomes uncooperative, including good leaver/bad leaver provisions and forced transfer scenarios.
Confidentiality and restrictive covenants
You’re likely to be sharing commercially sensitive information with shareholders, especially if they’re also involved in operations. The agreement should require them to keep that information confidential and, where appropriate, include restrictions on competing with the business or soliciting clients or employees. These provisions are essential to protect the company’s IP, relationships, and competitive position.
Getting these elements right means your shareholders’ agreement becomes a powerful tool and not just a legal requirement. It provides a framework that protects the business, aligns expectations, and helps you move quickly and confidently as you grow. But how does this document fit with your company’s existing legal framework, especially your articles of association?
Does a shareholders’ agreement override articles of association?
Not exactly, but it can take priority in practice.
Articles of association are a public document filed with Companies House that sets out your company’s internal governance rules. A shareholders’ agreement, by contrast, is private and typically more detailed. It allows shareholders to cover sensitive or bespoke arrangements without putting them on the public record.
Where there’s a conflict between the two, courts may enforce the articles when it comes to the company’s dealings with third parties or matters of corporate law. But between shareholders, a shareholders’ agreement is usually treated as binding, especially if all parties have signed it.
That’s why it’s crucial to ensure your articles and shareholders’ agreement are aligned. If they contradict each other, you risk confusion, disputes, or unintended outcomes. A good lawyer will help you harmonise the two documents so they work together, protecting both the company and its shareholders with no hidden landmines.
How to draft a shareholders’ agreement
When it comes to putting a shareholders’ agreement in place, the temptation is often to download a template and fill in the blanks. And for very early-stage companies where time and budget are tight, an online template might serve as a stopgap, and better than having no agreement at all.
But it’s important to be clear-eyed about the risks.
Most templates are designed for generic use. They rarely reflect the specifics of your business, your funding model, your shareholder dynamics, or your long-term growth plans. Worse, some may include outdated provisions or leave out critical protections altogether. In practice, that can mean a false sense of security, and a risk of serious complications if a dispute or exit event arises.
Common problems with templates include:
- Unclear or missing provisions on key governance matters
- No accommodation for future investment rounds or share option schemes
- Inadequate protection for minority shareholders or founder equity
- No alignment with the company’s existing articles or cap table
- Missing terms, or terms that are not enforceable under UK company law
If you do opt for a template as an interim measure, do so with a clear plan to replace it with a tailored agreement as soon as possible. The cost of custom legal advice at that point is often far outweighed by the protection, clarity and investor confidence it brings, essential if you’re navigating early funding rounds. A good shareholders’ agreement doesn’t just cover you legally, it sets your business up to grow on solid foundations.
Why using a lawyer makes all the difference
While online templates can provide a short-term fix, there’s no substitute for a shareholders’ agreement that’s been properly drafted by a lawyer who understands your business.
A good lawyer doesn’t just insert boilerplate clauses, they ask the right questions.
- Who are your shareholders now, and who might come on board later?
- What’s your funding plan?
- How do you want decisions to be made, profits to be shared, exits to be handled?
- What risks do you want to guard against?
Understanding your responses enables them to draft an agreement that:
- Anticipates likely points of friction and builds in safeguards
- Allocates rights and responsibilities fairly, reducing scope for conflict
- Protects both the company and individual shareholders against uncertainty
- Works alongside your articles and your long-term fundraising plans
From there, they’ll create a document that’s legally sound, commercially realistic, and aligned with your growth strategy. They’ll make sure it dovetails properly with your articles of association, avoids regulatory pitfalls, and includes the right protections, whether that’s drag-along rights, bad leaver clauses, or dispute mechanisms. And they’ll future proof it, so you’re not constantly going back to the drawing board as your business evolves.
Ultimately, a well-drafted shareholders’ agreement is a small investment that can prevent major headaches or even save your business. It brings clarity, reduces risk, and gives both you and your investors confidence that the company is being built on solid legal ground.
A real-world example: avoiding a founder fallout
Imagine two friends, Alex and Priya, who co-founded a fast-growing tech startup. In the early days, they used an off-the-shelf shareholders’ agreement from an online template. It seemed to cover the basics: who owned what, some voting rights, and a vague exit clause. They were in a rush and didn’t want to spend on legal fees.
Two years in, the company had grown rapidly. But cracks were beginning to show. Priya wanted to raise external investment and scale aggressively. Alex was more cautious and had started pulling back from the business. When Priya tried to bring in a new investor, Alex refused to agree, citing a clause in the shareholders’ agreement that required unanimous approval for issuing new shares.
With no clear dispute resolution process, no well-defined leaver provisions, and a rigid consent mechanism that hadn't been tailored to their future plans, the company was stuck. The investor walked away. Tensions escalated. Eventually, Priya had to negotiate a costly buyout of Alex’s shares, delaying growth by nearly a year and costing tens of thousands in legal and advisory fees.
Had they worked with a lawyer at the outset, the agreement could have included tailored provisions: drag-along and tag-along rights, good/bad leaver clauses, a clear investment process, and a mediation mechanism. That initial investment in legal advice could have saved them a year of conflict, missed funding, and lost momentum.
Legal assistance with drafting a shareholders’ agreement
At this stage of your company’s growth, getting the legal foundations right isn’t just a box to tick, it’s a strategic move. A well-drafted shareholders’ agreement protects your business, your relationships, and your ability to scale.
Our team has extensive experience advising founders and early-stage companies. We don’t just hand you a template, we work with you to understand your goals, pre-empt potential friction points, and craft an agreement that gives you confidence for the road ahead.
Whether you’re bringing on a co-founder, issuing equity to early investors, or gearing up for a funding round, we can help you put the right legal structure in place.
For more answers to commonly asked questions and advice on shareholders’ agreements, consult our corporate solicitors. Get in touch on 0800 689 1700 email us at enquiries@harperjames.co.uk, or fill out the short form below with your enquiry.
