Shareholders' Agreement FAQs for UK Founders
Written by Vanessa Challess, Solicitor, qualified 2003 · Last reviewed
If you run a UK limited company with co‑founders, these are the questions you should be asking before you sign anything. This page covers the most common issues founders raise about shareholders' agreements, deadlock, leavers and "do we really need this?". It's written for straightforward founder teams, not complex investor deals or restructuring.
Do we really need an agreement?
Do we really need a shareholders' agreement if we already have standard articles?
Yes, if there is more than one shareholder. The model articles are a basic rulebook, but they don't deal with the real flashpoints between founders: deadlock, exits, leavers, valuation, or what happens on death or dispute. A shareholders' agreement fills those gaps and lets you set your own rules in a private contract. For most founder teams, the articles and a good shareholders' agreement work together – they are not either/or.
Can we just rely on being friends or family and deal with problems if they come up?
You can, but that is exactly how most shareholder disputes start. While things are going well, everyone assumes they will stay aligned forever. The problems usually arrive later – when someone wants to leave, needs to de‑risk personally, gets divorced, or stops pulling their weight. A shareholders' agreement is there to preserve the relationship by deciding the hard stuff in advance, while you can still talk to each other like adults.
What's the risk of just using any generic shareholders' agreement template I find online?
Generic templates are rarely written for your cap table, your sector or UK law, and they almost never line up with your articles or future plans. The big risk isn't a minor drafting quirk, it is that you lock in unfair or unworkable rules on exits, valuation or investor rights that only bite once there is serious money or conflict at stake. By the time you discover the problem, it is usually far more expensive to fix than getting the right document in the first place.
What happens if things go wrong?
What happens if we are 50/50 shareholders and we disagree on a big decision?
In a straight 50/50 company, neither of you can force through an ordinary resolution on your own, so a serious disagreement can effectively deadlock the business. That can block decisions on funding, hiring, paying dividends or even selling the company. A well‑drafted shareholders' agreement builds in a deadlock mechanism – usually an escalation process, then mediation, and as a last resort some form of buy‑out or exit route – so you have a way to move on without going straight to court.
Can I force a difficult or unresponsive shareholder to sell their shares?
Not in general, unless you already have a contract that allows it. Company law gives you some remedies for extreme situations, but it does not give you a simple 'kick them out' button because you have fallen out. That is why many shareholders' agreements include compulsory transfer clauses, good/bad leaver provisions and 'events of default' that allow the other shareholders to force a sale at an agreed valuation when certain behaviour crosses the line.
What happens to a shareholder's shares if they die, divorce, or lose capacity?
Without an agreement, their shares usually pass under their will or intestacy rules and may end up owned by a spouse, ex‑spouse or family member who has no involvement in the business. That can freeze decisions and make exits very hard. A shareholders' agreement can require shares to be offered back to the remaining shareholders, or bought using insurance‑backed cross‑option or buy‑back arrangements, so control stays with the people actually running the company while the family receives value.
How are shares valued if a founder leaves the business?
If you don't agree a valuation mechanism upfront, it quickly becomes one of the most expensive parts of any exit dispute. Typical shareholders' agreements either fix a formula – for example, based on profit or an agreed multiple – or appoint an independent accountant to certify 'fair value' as an expert, under clear rules on discounts and assumptions. The key is not to chase the perfect formula, but to agree some fair, workable rules now while everyone is still broadly aligned.
What's the difference between a good leaver and a bad leaver?
A good leaver is someone who leaves on benign terms, for example resigning on good terms, retiring or stopping through ill health. In our pack a good leaver receives Fair Value for their shares, set by an independent accountant. A bad leaver is someone who leaves in difficult circumstances, such as gross misconduct or leaving to join a competitor, and may receive the lower of what they paid and Fair Value. Death is usually dealt with separately, by a cross-option. Those definitions and price rules should be spelt out clearly so no one is surprised later.
What happens if a founder dies?
What is a cross-option agreement, in plain English?
A cross-option agreement is a short contract that sits alongside your shareholders' agreement and spells out what happens to the shares if a shareholder dies (critical illness needs different arrangements and advice). It normally gives the surviving shareholders the right to buy the deceased's shares at an agreed value, and gives the estate the right to require that buy-out on the same terms. The idea is simple: instead of the family inheriting an illiquid stake they can't use, they receive cash; instead of you inheriting a new co-owner who never chose the role, you keep control of the business.
Why isn't a shareholders' agreement on its own enough if a founder dies?
A shareholders' agreement can set rules between the shareholders while they are alive, but it doesn't stop the deceased's shares passing under their will or the intestacy rules. In practice, that often means a spouse or children inherit a blocking stake in the company, with full voting and dividend rights but no involvement in the day-to-day business. Without a cross-option and some form of life cover, there may be no right, and no funding, to buy those shares back – so you can end up in deadlock with someone who never chose to be your co-owner.
How does life insurance fit into a cross-option?
In a typical founder setup, each shareholder takes out a life policy on their own life, arranged through an independent financial adviser and written in trust for the other founders. If one of you dies, the insurer pays the trustees named in the policy and its trust, not the company or the estate. The trustees hold the money for the surviving founders, who use it to buy the deceased's shares from the estate at the agreed price. The family gets the price in cash; the surviving founders acquire the shares; and the company's balance sheet isn't suddenly drained to fund an emergency buy-out.
Is this template the right tool?
Can we use this template if we plan to raise investment in the future?
You can use a founder‑level agreement now, but you should assume it will need to be replaced or heavily amended when you bring in serious investors. Institutional investors and sophisticated angels will expect their own terms on things like preference shares, veto rights and exit. The template and quiz are designed for simple founder teams with ordinary shares and no external investors. Once you have a term sheet, you are firmly in bespoke‑advice territory.
Is this template suitable if one of the shareholders is a company or a trust?
No. This particular template is designed for two to four individual founder‑shareholders, all holding one class of ordinary shares directly. As soon as you introduce corporate or trust shareholders, the tax, control and regulatory issues become more complex and often need tailored drafting. In those cases, you should be looking at a bespoke shareholders' agreement and aligned advice, not a founder‑only template.
Do all founders have to be directors, or can someone be a shareholder only?
They don't all have to be directors. Someone can just be a shareholder, just a director, or both. What matters is that your paperwork matches reality: the shareholders' agreement, articles and any directors' service agreements should make it clear who sits on the board, who has information rights, and what happens to someone's shares if they step down from the board or from employment. That avoids arguments later about 'shadow' roles and expectations.
How do I know if I need a solicitor instead of a template?
As a rule of thumb, a template is only appropriate for a simple UK company with a small number of individual founders, one class of ordinary shares and no live disputes or external investors. If you already have, or expect soon to have, institutional investment, multiple share classes, serious shareholder tension, cross‑border elements, complex tax planning, or any shareholder is a company, LLP or trust (for example a holding company or family trust), you are beyond template territory. At that point, paying for bespoke advice is genuinely cheaper than trying to unwind a bad agreement later.
How the agreement works in practice
What is the difference between a shareholders' agreement and articles of association?
The articles are the company's public rulebook. They bind the company and every member automatically, including future shareholders (Companies Act 2006, s 33), and change by special resolution (s 21). A shareholders' agreement is a private contract that binds only the people who sign it. It is where founders agree leavers, valuation, deadlock and vetoes. If the two conflict, the company follows its articles, and your remedy is a claim against the founder who broke the agreement. Our pack does not amend your articles. Read shareholders' agreement vs articles of association for more.
What is a deed of adherence, and when does a new shareholder need one?
A deed of adherence is a short deed in which a new shareholder agrees to be bound by your existing shareholders' agreement as if they had signed it originally. Without one, a newcomer is bound by the articles but not by the agreement. In the Founders & Shares agreement, anyone receiving new shares, buying from a founder, taking a family transfer or buying a leaver's shares must sign the Deed of Adherence in Schedule 3 first. It must be signed before a witness (Law of Property (Miscellaneous Provisions) Act 1989, s 1(3)). See our deed of adherence guide.
What is the difference between drag-along and tag-along rights?
A drag-along lets a set majority require the other shareholders to sell to the same buyer on the same terms, so one holdout cannot block a sale. A tag-along lets minority shareholders join a sale that hands a buyer control, on the same terms. Neither exists automatically in a small private company: the statutory buy-out rules only apply after a takeover offer reaches 90% (Companies Act 2006, ss 979 and 983). Both are optional in our agreement, with limits on what a dragged founder must sign up to. More in drag along vs tag along.
What are reserved matters in a shareholders' agreement?
Reserved matters are big decisions the company will not take until the shareholders approve them at an agreed level, such as issuing shares, borrowing above a limit, selling the business or changing the articles. Without them, the directors manage the company (Model Articles, art 3). In the Founders & Shares agreement you choose Simple Majority, Qualified Majority (75%), Unanimous Consent or Not reserved for each item. Any item left without a single level needs Unanimous Consent. Read reserved matters and pre-emption rights.
Do shareholders have pre-emption rights when another shareholder sells their shares?
Not automatically. The Companies Act right of first refusal applies when a company allots new shares (s 561), not when a shareholder sells existing ones. The Model Articles only let the directors refuse to register a transfer (art 26). So a right of first refusal on transfers has to be agreed. In our agreement, a founder who wants to sell must offer all their shares to the others first, with a price challenge and an independent valuation if needed, before selling to an outside buyer who signs a deed of adherence. The Founders & Shares pack sets this out in clause 12.
How do we sign a shareholders' agreement as a deed?
Our agreement and Cross-Option Deed are both deeds, because the agreement gives a power of attorney, which must be given by deed (Powers of Attorney Act 1971, s 1). Each founder signs in the physical presence of a witness who attests the signature, and the documents are delivered as deeds (Law of Property (Miscellaneous Provisions) Act 1989, s 1). The company signs by a director with a witness, or by two authorised signatories with no witness (Companies Act 2006, s 44(2)). Use an independent adult witness, not a video call. The Signing-Day Pack has a witness checklist; see also Read This First.
Should we use a template or pay a solicitor for a bespoke shareholders' agreement?
A template can work for a simple company: 2 to 4 individual founders, one class of ordinary shares, no outside investors and no live dispute. The Founders & Shares pack costs £325 and includes the agreement, a Cross-Option Deed, guides and a Signing-Day Pack, but you complete, sign and file everything yourselves. Use a solicitor if you have investors, more than one share class, a company or trust shareholder, EMI options, a dispute, or you want your articles amended. Solicitors' fees vary, so ask for a fixed quote. The Read This First guide and the quiz on the product page help you decide.
If your answers are throwing up red flags, start with the quick quiz on our Founders & Shares page. If that suggests you're beyond template territory, speak to your own solicitor, or, if you don't already have one, you can reach out to our friends at Bonsai Law for a bespoke agreement.
Ready to get your shareholders' agreement sorted?
Our plain-English shareholders' agreement pack includes everything you need – Shareholders' Agreement, Cross-Option Deed, deed of adherence, how-to guides and a Signing-Day Pack.
See the Shareholders' Agreement Pack