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Shareholders' Agreement

Also known as: Shareholder Agreement, SHA

Definition

A shareholders' agreement is a private contract between company shareholders that sets out how the business will be run, how shares can be transferred, and what happens when a shareholder dies or wants to exit.

Understanding your shareholders' agreement is crucial when making a will, as it may restrict who can inherit your shares and require your executor to follow specific procedures.

What Does Shareholders' Agreement Mean?

A shareholders' agreement is a legally binding private contract between shareholders that governs their relationship and how the business operates. Unlike Articles of Association—public documents filed at Companies House—shareholders' agreements remain confidential and can be tailored to specific circumstances. Under the Companies Act 2006, these agreements operate as contractual arrangements governed by contract law, giving business owners flexibility to create provisions that suit their needs.

The agreement sits alongside Articles of Association but covers practical scenarios in greater detail: what happens when a shareholder wants to sell shares, retires, becomes incapacitated, or dies. Common provisions include pre-emption rights (shares must be offered to existing shareholders first), decision-making procedures, dispute resolution mechanisms, and valuation methods for share transfers.

When a shareholder dies, most agreements include restrictions affecting how executors distribute shares. Sarah and David own a digital marketing agency 50/50. Their agreement states that on death, shares must be offered to the surviving shareholder at a price based on average profits. When Sarah dies unexpectedly, her will leaves "all my assets to my sister Emma." David has the right to purchase Sarah's £280,000 worth of shares before Emma can inherit them. Emma receives cash, not shares—demonstrating how agreements restrict transfers even when wills name different beneficiaries.

Business owners must review their shareholders' agreement before making a will to ensure estate planning intentions align with contractual restrictions. Your executor must comply with the agreement's terms, regardless of what your will says. If your agreement requires shares sold at book value but you intended your spouse to receive ongoing income from the business, this mismatch creates problems your executor cannot avoid.

Common Questions

"Do I need a shareholders' agreement if I already have Articles of Association?" Yes, a shareholders' agreement complements your Articles of Association with additional protections. While Articles are public documents with statutory requirements, a shareholders' agreement is a private contract including detailed provisions on share transfers, dispute resolution, and exit strategies tailored to your business needs.

"What happens to a shareholders' agreement when a shareholder dies?" The agreement typically includes provisions determining what happens to their shares. Most agreements require the deceased's shares to be offered to surviving shareholders or sold back to the company at a predetermined valuation. This prevents unknown beneficiaries from becoming shareholders and ensures business continuity.

"Can a shareholders' agreement override my will?" A shareholders' agreement doesn't override your will, but it restricts how shares can be transferred after death. If your agreement includes pre-emption rights or mandatory sale provisions, your executor must comply with these restrictions before distributing shares to beneficiaries. This is why business owners must ensure their will aligns with their agreement terms.

Common Misconceptions

Myth: A shareholders' agreement is only needed when there are disputes or trust issues between business partners

Reality: Shareholders' agreements are essential protection documents that should be in place from the start. They provide clear procedures for predictable events like death, retirement, or business sale—not just disputes. The best time to agree on these rules is before they're needed, when everyone's interests are aligned.

Myth: The Articles of Association are sufficient—I don't need a separate shareholders' agreement

Reality: Articles of Association are the company's public constitutional document with basic statutory rules, while a shareholders' agreement is a private contract addressing specific scenarios. Articles alone rarely cover crucial issues like what happens when a shareholder dies, wants to sell, or becomes incapacitated. The agreement fills critical gaps that Articles cannot address.

  • Cross-Option Agreement: Often incorporated within shareholders' agreements to provide insurance-funded mechanisms for share purchases when a shareholder dies.
  • Company Shares: The underlying asset that shareholders' agreements regulate regarding ownership and transfer after death.
  • Articles of Association: The company's public constitutional document that shareholders' agreements supplement with additional private protections.
  • Pre-emption Rights: Right of first refusal requiring shares to be offered to existing shareholders before external transfer.
  • Drag-Along Rights: Provisions allowing majority shareholders to force minority shareholders to join when selling the business.
  • Tag-Along Rights: Provisions protecting minority shareholders by allowing them to join when majority shareholders sell their shares.

Need Help with Your Will?

If you own company shares, understanding your shareholders' agreement is crucial before creating your will. Ensuring your estate planning works within contractual restrictions protects your beneficiaries from unexpected complications.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.