Shareholders' Agreement

The importance of having a shareholders' agreement is often over-looked or, whilst recognised to some degree, deferred to another day.

When people go into business together it is usually in circumstances where there is a significant degree of mutual trust and in those circumstances many feel that dealing with a shareholders' agreement is a waste of time and energy better spent on developing the business itself: "We get on with each other so what is the point in throwing money at lawyers in what would be a pointless exercise" . The trouble is that this approach fails catastrophically when shareholders fall out and have made no provision for fundamental issues such as exit strategies and succession planning. Additional issues are also relevant dependent on the structure of the shareholdings and a shareholders' agreement needs to be developed as a tailored document to reflect the potential issues that could arise and provide appropriate rights and recourse where necessary. Whilst one size does not fit all, here are a few of the issues that a shareholders' agreement can address and which any shareholder in a company should consider carefully:

  • Entrenched rights to appoint a director;
  • Veto right/positive consent rights;
  • Pre-emption on issue and transfer of shares;
  • Permitted transfers to group companies/family members;
  • Mandatory transfer events (e.g. shareholder ceasing to be an employee);
  • Good leaver/bad leaver provisions;
  • Dispute resolution mechanisms (including buy-out provisions if continued deadlock);
  • Cross options (whereby shareholders take out life cover which is held on trust for the other shareholders and enter into a cross option agreement enabling or requiring a deceased shareholder's estate to sell the deceased's shares with the purchase price coming from the proceeds of the life policy - this provides a mechanism and the means for the surviving shareholders to acquire the deceased's shares);
  • Keyman insurance requirements (for the benefit of the company itself rather than the surviving shareholders);
  • Funding policy; and
  • Share classes (including, if relevant, preference shares with priority/enhanced rights to dividends and distributions.


For details of recent projects, please see our Review of Business 2014

For specialist legal advice please contact:
Yavan Brar on 01189 899713 or by email at yavan.brar@herrington-carmichael.com
Alex Canham on 01189 899717 or by email at alex.canham@herrington-carmichael.com

" Thank you Michelle. Your help throughout has been greatly appreciated, I certainly couldn't have managed my way through this process without both yours and Yavan's guidance."
Malcolm Berrido, Carter Jones Financial

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