What is the difference between a shareholders' agreement and articles of association under UK law?

A shareholders' agreement and articles of association serve complementary but distinct purposes under English law. The articles of association are the company's constitutional document, required by section 18 of the Companies Act 2006, and operate as a statutory contract between the company and its members (section 33). They are a public document, filed at Companies House and available for anyone to inspect. A shareholders' agreement, by contrast, is a private contract between the shareholders (and usually the company), which is not filed at Companies House and is confidential. The shareholders' agreement typically contains provisions that go beyond those in the articles, such as reserved matters requiring shareholder consent, tag-along and drag-along rights, good/bad leaver provisions, dividend policies, and deadlock resolution mechanisms. In the event of a conflict between the two documents, the shareholders' agreement will prevail as between the parties to it, but the articles remain binding as a statutory contract on the company and all members, including future members who were not party to the shareholders' agreement.

Are tag-along and drag-along rights enforceable under English law?

Yes, both tag-along and drag-along rights are enforceable under English law when properly drafted in a shareholders' agreement. Tag-along rights protect minority shareholders by allowing them to sell their shares on the same terms as a majority shareholder who is selling to a third party. Drag-along rights protect majority shareholders by enabling them to compel minority shareholders to sell their shares as part of a full exit. These rights are not provided by the Companies Act 2006 and must be contractually agreed. For enforceability, drag-along clauses typically include a power of attorney provision allowing the company (or the majority shareholder) to execute the share transfer on behalf of the minority shareholder if the minority shareholder fails to comply. English courts have upheld such provisions, provided they are exercised in good faith and the minority shareholders receive the same price and terms as the majority shareholders.

What are reserved matters in a UK shareholders' agreement?

Reserved matters are specific decisions that require the prior approval of the shareholders (either unanimously or by a specified majority), rather than being left to the discretion of the board of directors alone. They are one of the most important protections for minority shareholders in a private company. Common reserved matters include: issuing new shares or varying share rights, amending the articles of association, changing the nature of the company's business, entering into material contracts above a specified value, appointing or removing directors, declaring dividends, approving annual budgets, creating charges over company assets, making loans or granting guarantees, acquiring or disposing of material assets, and passing a resolution to wind up the company. The Companies Act 2006 already requires certain matters to be approved by shareholders (such as changes to the articles under section 21, which requires a special resolution of 75%), but a shareholders' agreement can impose additional consent requirements beyond those required by statute.

How does a Bushell v Faith clause work in a shareholders' agreement?

A Bushell v Faith clause derives from the House of Lords decision in Bushell v Faith [1970] AC 1099. Under section 168 of the Companies Act 2006, shareholders have the right to remove a director by ordinary resolution (a simple majority of votes cast). A Bushell v Faith clause counteracts this by giving a director who is also a shareholder enhanced voting rights on any resolution to remove them from the board. For example, if a director holds 100 shares, the clause might provide that each of those shares carries 3 votes on a resolution to remove that director, effectively making it impossible for the other shareholders to achieve a majority. The House of Lords held that such a clause does not contravene the statutory right of removal because section 168 does not regulate the number of votes that may be attached to shares. Bushell v Faith clauses are only relevant to private companies and are typically included in the articles of association rather than the shareholders' agreement, though the shareholders' agreement may contain a covenant requiring the shareholders to maintain such a provision in the articles.

What are good leaver and bad leaver provisions under English law?

Good leaver and bad leaver provisions are contractual mechanisms used in shareholders' agreements to regulate what happens to a shareholder's shares when they leave the company (typically because they were also a director or employee). A 'good leaver' is a shareholder who departs in circumstances beyond their control or fault, such as death, permanent incapacity, redundancy, or termination of employment by the company without cause. A good leaver is typically entitled to sell their shares at fair market value, determined by an independent valuer. A 'bad leaver' is a shareholder who departs in circumstances involving fault or breach, such as gross misconduct, material breach of the shareholders' agreement, conviction of a criminal offence, voluntary resignation within a specified period, or disqualification as a director. A bad leaver is typically required to sell their shares at a discounted price, often the lower of the nominal value and the original subscription price. These provisions must be carefully drafted to ensure they are not treated as a penalty under English law (following Cavendish Square Holding BV v Makdessi [2015] UKSC 67) and should clearly define the circumstances that constitute each category.

Shareholders' Agreement (UK) — Canada

Protect the interests of all shareholders in a company incorporated in England and Wales with a comprehensive Shareholders' Agreement. This legally binding document governs the relationship between shareholders and the company, covering board composition, reserved matters (veto rights), dividend policy, share transfer restrictions with pre-emption rights, tag-along and drag-along rights, deadlock resolution, good leaver and bad leaver provisions, restrictive covenants, and confidentiality obligations. Drafted in accordance with the Companies Act 2006 and English common law, this template is suitable for private companies with two or more shareholders who need clearly defined governance rules.

What Is a Shareholders' Agreement (UK)?

A Shareholders' Agreement is a private contract between the shareholders of a company incorporated in England and Wales that governs the relationship between the shareholders and sets out their rights and obligations in relation to the ownership and management of the company. It is one of the most important governance documents for any private company with more than one shareholder, providing a framework for decision-making, share transfers, dispute resolution, and exit mechanisms that goes far beyond what is provided by the Companies Act 2006 or the company's articles of association.

Under English law, a shareholders' agreement is a binding contract governed by common law principles of contract. It is entered into voluntarily by the shareholders and typically also by the company itself (to ensure the company is bound by the obligations it contains). Unlike the articles of association, which are a public document filed at Companies House and constitute a statutory contract under section 33 of the Companies Act 2006, a shareholders' agreement is a private and confidential document. This means that the commercial terms agreed between the shareholders (such as dividend policies, reserved matters, and leaver provisions) are not visible to competitors, creditors, or the general public.

The relationship between a shareholders' agreement and the articles of association is a critical aspect of UK company law. Where the two documents conflict, the shareholders' agreement prevails as between the parties to it, but the articles remain the constitutional document of the company and bind the company and all of its members, including any future shareholders who join after the agreement was signed. For this reason, a well-drafted shareholders' agreement will typically include an obligation on the parties to procure that the articles are amended to the extent necessary to give effect to the agreement, and will include a provision that any new shareholder must accede to the shareholders' agreement as a condition of acquiring shares.

When Do You Need a Shareholders' Agreement (UK)?

A Shareholders' Agreement is appropriate whenever a private company incorporated in England and Wales has two or more shareholders who wish to define their respective rights and obligations in a way that goes beyond the default provisions of the Companies Act 2006 and the articles of association. It is particularly important in the following circumstances.

Firstly, where two or more individuals are founding a company together. The agreement establishes clear rules from the outset about decision-making, shareholdings, roles and responsibilities, and what happens if the relationship breaks down. Without a shareholders' agreement, disputes between co-founders can be difficult and expensive to resolve, potentially requiring a winding-up petition under section 122(1)(g) of the Insolvency Act 1986 on the grounds that it is 'just and equitable' to do so.

Secondly, where external investment is being introduced. Venture capital firms, angel investors, and private equity investors will almost always require a shareholders' agreement (often called an investment agreement) that protects their investment through anti-dilution provisions, information rights, board representation, consent rights over reserved matters, and defined exit mechanisms including drag-along and tag-along rights.

Thirdly, where shareholders are also directors or employees of the company. Good leaver and bad leaver provisions ensure that if a shareholder leaves the company (voluntarily or involuntarily), there is a clear mechanism for determining the price at which their shares must be transferred. Without such provisions, a departing shareholder could refuse to sell their shares or demand an inflated price, creating a deadlock.

Fourthly, in 50/50 joint ventures or where no single shareholder has a majority. Deadlock resolution mechanisms (such as mediation, expert determination, or a buy-sell mechanism) are essential to prevent the company from being paralysed by disagreement between equal shareholders. The landmark case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 illustrates the difficulties that can arise in quasi-partnership companies without adequate governance provisions.

What to Include in Your Shareholders' Agreement (UK)

A well-drafted Shareholders' Agreement for a company incorporated in England and Wales should contain several essential provisions that work together to create a comprehensive governance framework.

The share capital clause records the current shareholdings of each shareholder and provides the basis for proportional rights throughout the agreement. It should specify the number and class of shares held by each shareholder and the percentage of the total issued share capital they represent.

The board composition clause defines the structure of the board of directors, including the total number of directors, the right of each shareholder to appoint (and remove) directors, quorum requirements for board meetings, and voting procedures. This is particularly important where shareholders want to ensure they have representation at board level proportionate to their investment.

The reserved matters clause is one of the most critical provisions. It lists specific decisions that cannot be taken by the board alone and require the prior written consent of all (or a specified majority of) shareholders. This gives minority shareholders veto power over major decisions that could affect the value of their investment.

The share transfer restrictions govern how and when shareholders can sell their shares. Pre-emption rights require a selling shareholder to offer their shares to the existing shareholders before selling to a third party. Tag-along rights protect minority shareholders by allowing them to join a majority shareholder's sale on the same terms. Drag-along rights protect majority shareholders by allowing them to force minorities to sell their shares as part of a complete exit.

The deadlock resolution mechanism is essential for companies with equal shareholders. Common mechanisms include escalation to senior representatives, mediation under the Centre for Effective Dispute Resolution (CEDR) rules, expert determination, and buy-sell (Russian roulette) provisions.

Good leaver and bad leaver provisions define the price at which a departing shareholder must sell their shares, depending on the circumstances of their departure. The confidentiality clause protects commercially sensitive information. The governing law clause should specify the laws of England and Wales.

What Is a Shareholders' Agreement (UK)?

When Do You Need a Shareholders' Agreement (UK)?

What to Include in Your Shareholders' Agreement (UK)

Frequently Asked Questions

Related Documents

Articles of Association (UK)

Director's Service Agreement (UK)

Non-Disclosure Agreement (NDA) (UK)

Partnership Agreement (UK)