What is a shareholders' agreement? Privacy, key clauses and approval thresholds explained

A shareholders' agreement is a legally binding contract between the shareholders of a company, and sometimes the company itself, that sets out how the owners will deal with each other and with the business. Unlike the articles of association, it is private. This page explains what it is, why its privacy matters, the clauses most start-ups should consider, and the one definition that trips people up: what counts as "shareholder approval".

What is a shareholders' agreement?

In short, a shareholders' agreement is a legally binding contract signed by the shareholders of a company, and sometimes by the company itself.

The shareholders, also known as the members of a company, are its true owners. They own shares, meaning parts of the company. The agreement details a few key things about that ownership, including, for example, the obligations the shareholders have towards the company.

Because it is a contract, it binds the people who sign it in the way any contract does. That is both its strength and its limit: it governs the relationship between those shareholders, but only those shareholders.

Shareholders' agreement vs articles: privacy

One thing to keep in mind is that a shareholders' agreement is a private document. It is not published at Companies House, the public register that anyone can access.

That is unlike the articles of association, which are published at Companies House and are therefore not private. Anyone, including competitors, customers and prospective investors, can read your articles.

In practice this is one of the main reasons owners use a shareholders' agreement at all. Matters you would rather keep between the owners, such as how you have agreed to share decision-making or what each shareholder has committed to do for the company, can sit in the agreement rather than on the public record.

Key clauses: non-compete and reserved matters

What might you want to include? Here are three things to consider.

• Non-compete. A clause stating that shareholders should not compete with the company. A shareholder who owns part of the business should not be free to set up or work for a rival while they remain an owner.
• Reserved matters. The kinds of decisions that are reserved for the shareholders to vote on, rather than being left to the directors. These are typically the big decisions about the company that the owners want a say in.
• The definition of shareholder approval. Certain decisions will require shareholder approval, but how do you define that? This sounds like a technicality and is anything but, so it gets its own section.

Shareholder approval thresholds explained

There are two main approaches to defining shareholder approval.

• Option one: more than 50% of all voting shares in the company. Every voting share counts, whether or not its holder turns up to the meeting.
• Option two: more than 50% of the voting shares present at a general meeting. Only the shares of those who attend and vote are counted.

The second option is better if you want to incentivise all shareholders to come out, attend general meetings and vote. If you do not attend, you have no say in the outcome.

The first option makes the 50% threshold harder to reach. It is entirely possible that certain shareholders decide not to attend a meeting, or are unable to, and under this approach their shares are effectively counted as being against whatever is proposed. A proposal can fail simply because not enough people showed up, even if everyone in the room was in favour.

Neither approach is wrong. The point is to choose deliberately, understand what it means for how decisions get made, and write it into the agreement so there is no argument later about whether a decision was validly approved.

When the agreement conflicts with the articles

Now that you have a good understanding of what a shareholders' agreement is, there is one more question to think about. Suppose you include provisions in your shareholders' agreement that conflict with the articles of association. That is entirely possible, particularly if the two documents were prepared at different times. Which document overrides which?

The answer depends on whether both documents are valid and on whether the agreement contains a supremacy clause. I cover it in full in does a shareholders' agreement override the articles?.

Next steps

If you have co-founders or investors and no shareholders' agreement, start by listing the decisions you want reserved for the shareholders, decide how you want shareholder approval to be defined, and agree whether shareholders will be restricted from competing. Then have a corporate solicitor draft the agreement so it works alongside your articles of association. For what to put in it, see what should a shareholders' agreement include? and how to structure a shareholders' agreement.