Who Should Enter Into a Shareholders Agreement: A Legal Guide for UK Businesses

If you are setting up a company with other people, bringing in investors or planning for future growth, one of the most common questions is: who should enter into a shareholders agreement?

In most UK private companies, a shareholders agreement should be entered into by the company itself and all of the key shareholders whose rights and obligations need to be clearly documented. That often includes founders, early investors and sometimes employee shareholders or family members who hold shares. The right parties will depend on your ownership structure, how decisions are made and what risks you are trying to manage.

A well-drafted shareholders agreement can help prevent disputes, set expectations early and protect the business as it grows. It works alongside the company’s articles of association, but it is usually more private, more flexible and better suited to dealing with commercial arrangements between shareholders.

If you are new to the topic, it can help to first understand what a shareholders agreement is and how it fits into your wider company setup.

What Is A Shareholders Agreement And Why Does It Matter?

A shareholders agreement is a private contract between some or all of the shareholders in a company, and often the company itself. It sets out how the company will be run, what rights shareholders have, what happens if someone wants to leave, and how certain decisions will be made.

For UK SMEs and startups, this agreement is often one of the most important governance documents after the articles of association. While the articles are filed at Companies House and apply as a matter of company law, a shareholders agreement is not publicly filed. That means it can deal with sensitive commercial matters in a more tailored way.

Common issues covered include:

• how decisions are made and which matters need shareholder approval
• director appointments and founder control
• share transfers and restrictions on selling shares
• what happens if a shareholder dies, becomes incapacitated or leaves the business
• pre-emption rights on new share issues or transfers
• drag-along and tag-along rights
• dividend policy
• confidentiality and non-compete style protections, where appropriate
• dispute resolution procedures

If you are comparing documents, it is also worth reading about the difference between a term sheet and a shareholders agreement, especially if you are in early-stage investment discussions.

Who Should Usually Be A Party To The Agreement?

There is no single rule that applies to every company, but in practice a shareholders agreement should usually include the parties whose legal rights and commercial expectations need to be aligned from the outset.

The Company

In many cases, the company itself should be a party. This can be important where the agreement places obligations on the company, such as requiring it to provide information, follow certain approval processes or recognise transfer restrictions.

Including the company can also help ensure the agreement operates smoothly alongside the articles of association and internal governance procedures.

All Founders

If the business has multiple founders, they should almost always be parties to the agreement. Founders are usually the people most involved in management, strategy and long-term growth, so it is important to document:

• who controls what
• how board decisions are made
• whether any founder has reserved rights
• what happens if a founder leaves early
• whether vesting or leaver provisions apply

For founder-led businesses, this is often where the greatest risk lies. A handshake understanding may work at the start, but it rarely gives enough protection once money, time and ownership become more significant.

If founder shares are linked to continued involvement, a vesting-based shareholders agreement may be worth considering.

Investors

If an investor is taking shares in the company, they will often want to be a party to the shareholders agreement. This is especially common where they are investing meaningful capital and want protections around governance, reporting, dilution and exit rights.

Investor rights commonly include:

• consent rights over major decisions
• anti-dilution or pre-emption protections
• information rights
• board appointment rights or observer rights
• exit provisions

Where the investment and shareholder arrangements are being negotiated together, you may need a combined subscription and shareholders agreement.

Employee Shareholders Or Minority Shareholders

Sometimes employees, consultants, family members or other minority holders own shares. Whether they should be parties depends on the structure and purpose of the agreement.

If they hold a meaningful stake, have voting rights or are affected by transfer restrictions and exit provisions, it often makes sense to include them. If they hold a very small stake under a separate incentive arrangement, a different document may be more appropriate.

The key question is practical: do they need to be bound by the same rules as the other shareholders, and do they need the benefit of those protections too?

When Might Not Every Shareholder Need To Sign?

Although many private companies choose to include all shareholders, there are situations where not every shareholder is made a party to the agreement.

For example:

• there may be a core agreement between founders and lead investors only
• some minority shareholders may sign a deed of adherence later when they acquire shares
• employee shareholders may be subject to separate share plan rules
• different classes of shares may carry different rights, making a single agreement less practical

That said, excluding shareholders can create complications. If someone is not a party, they may not be bound by important restrictions or obligations in the agreement. This can be a problem where you want consistent rules on share transfers, confidentiality, voting or exits.

One common solution is to require any new shareholder to sign a deed of adherence before shares are transferred or issued to them. This helps ensure that future shareholders are brought into the same contractual framework.

It is also important to think about how the agreement interacts with the articles. If a restriction only appears in the shareholders agreement, a non-party shareholder may not be bound by it. For that reason, some key transfer mechanics may need to be reflected in the articles as well.

For a broader look at the legal and practical issues, see this guide on how to draft a shareholders agreement in the UK.

What Factors Help Decide Who Should Be Included?

When deciding who should enter into a shareholders agreement, it helps to look at the commercial reality of the business rather than just the cap table.

Some of the main factors include:

1. Who Has Decision-Making Power?

If a person has voting rights, board influence or veto rights, they should usually be included. The agreement should reflect who really has a say in major company decisions.

2. Who Needs To Be Bound By Transfer Restrictions?

If you want restrictions on selling shares, rights of first refusal, compulsory transfer provisions or drag-along rights to apply, the relevant shareholders generally need to be parties.

For example, if an exit is a realistic future scenario, it is sensible to think carefully about drag-along rights and who must be bound by them.

3. Who Is Contributing Capital, Time Or Key Know-How?

Founders and investors are obvious examples, but there may also be strategic contributors whose involvement is central to the company’s success. If their role affects ownership, governance or exit planning, they may need to be included.

4. Are There Different Share Classes?

Where a company has ordinary shares, preference shares or growth shares, the agreement may need to distinguish between classes. In that case, the parties should include those whose rights are directly affected.

5. Is The Business Likely To Raise Investment?

If you expect to raise funds, your agreement should be drafted with future investors in mind. It may need accession provisions, pre-emption rights and a structure that can accommodate new parties without renegotiating everything from scratch.

If you are preparing for investment, it can also help to understand the difference between an investment agreement and shareholder arrangements. This article on investment agreement or shareholders’ deed explains the distinction.

What Should The Agreement Cover Once The Right Parties Are Identified?

Once you know who should be included, the next step is making sure the agreement actually deals with the issues that matter to your business.

Typical clauses include:

• Reserved matters: decisions that cannot be made without shareholder approval, such as issuing shares, taking on major debt or changing the nature of the business
• Board composition: who can appoint directors and how deadlocks are handled
• Share transfer rules: restrictions on transfers, rights of first refusal and compulsory transfers
• Leaver provisions: what happens if a founder or key shareholder leaves
• Funding obligations: whether shareholders must contribute more capital in future
• Dividend policy: how profits may be distributed
• Information rights: what financial and operational information shareholders can access
• Confidentiality: protection for sensitive business information
• Dispute resolution: a process for resolving disagreements before they damage the business

It is also worth remembering that a shareholders agreement is not a substitute for all other legal documents. Depending on your setup, you may also need founder service agreements, consultancy agreements, IP assignments, employment contracts or investment documents.

If you want a practical overview of common clauses, this guide to a shareholders’ agreement template is a useful starting point.

Common Mistakes UK Businesses Make

Many disputes arise not because businesses ignored the issue entirely, but because they used the wrong structure or left key people out.

Some common mistakes include:

• Only relying on the articles of association: articles are important, but they often do not go far enough for founder and investor arrangements
• Leaving out the company: this can create enforcement and governance issues where the company itself needs to comply with the agreement
• Excluding minority shareholders without thinking through the consequences: they may not be bound by important restrictions
• Failing to require new shareholders to accede: future share issues can undermine the agreement if new holders are not brought in
• Using a generic template without tailoring it: what works for one company may be unsuitable for another
• Not aligning the agreement with the articles: inconsistencies can create confusion and legal risk
• Ignoring founder exit scenarios: if someone leaves early, the business can be left with a difficult cap table and no clear solution

Where relationships have already become strained, shareholders may also need to understand the risks around unfair conduct and governance disputes. While every situation is different, this article on unfair prejudice in the UK explains one area business owners should be aware of.

Key Takeaways

• In most UK private companies, a shareholders agreement should usually be entered into by the company and the key shareholders whose rights and obligations need to be documented.
• That often includes founders, investors and any other shareholders who need to be bound by governance rules, transfer restrictions or exit provisions.
• Not every shareholder must always be a party, but excluding someone can create legal and practical gaps.
• The agreement should work alongside the articles of association, and important provisions may need to be reflected in both documents.
• Future shareholders should usually be required to sign a deed of adherence so the agreement continues to apply as the company grows.
• A tailored agreement can help reduce disputes, protect founder relationships and make the business more investment-ready.

If you would like help preparing or reviewing a shareholders agreement for your UK business, you can contact Sprintlaw on 08081347754 or email team@sprintlaw.co.uk.