Still Running on Model Articles? What a Shareholder Agreement Adds as You Grow
Two people start a company. They split the shares, file the paperwork and get on with winning work. The articles of association are whatever came out of the box at incorporation, and for a while that is fine - everyone agrees, and nobody opens the folder.
Then the company grows, and the questions the default documents never answered start to matter. What happens if one founder wants out? Can a shareholder sell to a stranger? What if you both own 50% and stop agreeing? Here is what the default "model articles" give you, where they stop, and what a shareholder agreement adds.
What the model articles give you
Most private companies limited by shares adopt the model articles, the standard default prescribed under the Companies Act 2006. They include more than many founders realise:
• The directors manage the company and can exercise all its powers (article 3). Day-to-day control sits with the board, not the shareholders.
• Directors generally make decisions by majority at a board meeting, or unanimously in writing (articles 7-8).
• The directors may refuse to register a transfer of a share (article 26(5)). In a company where the directors are also the founders, that is a real - if blunt - protection against an unwanted stranger buying in.
• Dividends are recommended by the directors and declared by ordinary shareholder resolution (article 30); shareholders cannot simply vote themselves one.
• On new share issues for cash, the Companies Act 2006 gives existing shareholders statutory pre-emption rights (section 561): new shares must generally be offered to them first, in proportion to their holdings. Statutory exceptions apply (bonus shares, non-cash issues, employees' share schemes), and the right can be disapplied.
The defaults are not nothing. But they are designed to work for every company, so they answer almost none of the questions that matter to yours.
The questions the defaults do not answer
The model articles are silent on the situations that most often break small companies:
• Exits. No agreed route for a shareholder who wants to leave - no right to be bought out, no agreed valuation, no timescale. A leaver can find themselves locked in; the rest can find themselves stuck with a disengaged co-owner.
• Leavers. Nothing distinguishes a founder who leaves on good terms from one who joins a competitor. There is no mechanism to buy back shares from someone who stops contributing, at any price.
• Deadlock. If two shareholders each hold 50% and disagree on something fundamental - taking on debt, selling the business, hiring - the defaults offer no way through. The company can grind to a halt with both sides entitled to stay exactly where they are.
• Transfers. The directors' power to refuse a transfer helps, but there is no orderly pre-emption process between shareholders, no drag-along right to deliver a clean sale of the whole company, and no tag-along right to protect a minority if the majority sells.
• Money. No dividend policy, no rules on further funding (who puts in more cash, and what happens to those who cannot), and no agreed approach to salaries versus drawings.
• What happens after. The model articles themselves say nothing about a departing shareholder competing, poaching staff or approaching customers. Other duties can still bite - a service agreement or employment contract may carry restrictive covenants, and some directors' duties linger after resignation - but the articles alone give no protection.
What a shareholder agreement adds
A shareholder agreement is a private contract between the shareholders that sits alongside the articles and fills these gaps. A typical one covers:
• Exit routes: how shares are valued (a formula, an independent valuer, an agreed process), who buys them, and over what period.
• Good leaver and bad leaver terms: what happens to the shares of a founder who leaves, and how the price depends on the circumstances.
• Deadlock resolution: a defined escalation route - negotiation, mediation, a casting mechanism, or in the last resort an orderly wind-down.
• Reserved matters: big decisions (borrowing, selling assets, issuing shares, senior hires) that need more than a simple majority - often unanimity or a named shareholder's consent.
• Transfer rules: pre-emption on sale, permitted transfers to family or trusts, and drag-along and tag-along rights so a genuine sale of the company can complete.
• Dividend and funding policy: an agreed framework rather than a fresh argument each year.
Because it is a contract, it is tailored to how you actually work together - and unlike the articles, it stays off the public register at Companies House.
The fallback nobody wants
Without agreed terms, a shareholder who believes the company's affairs are being run unfairly to their detriment is left with the court routes. The best known is an unfair prejudice petition under section 994 of the Companies Act 2006, often ending in a court-ordered buy-out; in the last resort there is also a just and equitable winding-up petition. All of these are litigation - slow, expensive and corrosive while they run. A shareholder agreement is a way of agreeing in advance what you would otherwise pay lawyers to argue about later.
When to put one in place
The best time to write a shareholder agreement is the moment nobody thinks they need one. When the founders are getting on, the terms are quick and friendly to agree. Once relations strain, every clause becomes a negotiation about the dispute you are already having.
Natural trigger points: taking on a first investor, bringing in a co-founder or senior hire with equity, the company's value reaching a level worth arguing over, or simply realising you could not answer "what if one of us wanted out?" over coffee. If your company is still on the defaults, start with a short review: what do your articles actually say, and which gap above would hurt most if it opened up tomorrow?
Thinking about a shareholder agreement - or not sure what your current articles say? We can review what you have, flag the gaps, and put terms in place that fit how you actually work. Call us on 0330 043 7544 or visit www.yourlegalteam.org.uk to book an initial chat. And if the questions keep coming as you grow, ongoing support is usually a better fit than one-off fixes.