Example term sheet for a shareholders’ agreement in a UK company

This example combines several of the terms discussed above into more naturally grouped topics that you can use as conversation starting points.

If you find the way this term sheet is laid out to be useful, you’re in luck - Robolawyer’s unique term building system helps you complete your term sheet progressively, alone or with your co-founders.

Once filled out, all of the documents you need will be put together automatically - without any irrelevant wording or square brackets for you to comb through. Learn more →

Documents required for shareholders’ agreements

How do terms agreed in principle between founders translate to documents?

Ultimately, this is about formalising an agreement between shareholders; making it legal and enforceable. Term sheets are typically not binding; the agreement still needs to be implemented to have legal effect. The documents implement the agreement in several ways:

• by creating new contracts between people,
• by creating new shares and issuing them to people (where required),
• by creating new rules that the company must abide by, and
• by keeping proper records that the right procedures were followed.

The key thing to understand is that a term does not translate directly to a document; the documents should together reflect the terms you have agreed while ensuring that the correct legal procedures are followed.

How do we get the documents prepared?

You have a few options:

1. Use Robolawyer to prepare, update and amend your documents automatically - all you have to do is provide the information that appears in the example term sheet. Once happy, Robolawyer will help with the entire remainder of the process - all for a fixed fee.

2. Engage a lawyer. But make sure they have done this kind of stuff before. Question what value they are adding, considering that most of the work (understanding and agreeing the key terms) will be done by you and your co-founders.

3. Download templates. Not recommended unless you really know what you’re doing - in which case you probably wouldn’t be reading this.

4. Ask AI. Not recommended unless you have legal training and experience. Even then, AI will only spit out some text - it’s up to you to translate that text into a legally binding transaction.

It’s really difficult to know how to prepare these documents in the best way. My knowledge of this comes from:

• understanding how the various types of law relating to shareholders (company, contract, employment, tax) work and interact with each other
• knowing what standard practice is; the accepted way of doing things, and
• advising many people in similar but unique situations.

That’s why I built Robolawyer - to put all of that knowledge into a framework that non-lawyers can understand.

Why is it important to read the documents?

Since you are responsible for what you sign, “you must read the documents” is an understatement!

Not doing so can lead to:

• total omission of crucial terms or parties,
• terms agreed in principle not accurately reflected in the final implementation,
• procedural requirements that someone might not agree with,
• unnecessary mistakes and errors that can be costly and take time to fix, or
• incorrect calculations and other secondary data in schedules or appendices.

You must read the documents! We’ll continue with an overview of what each one is.

Shareholders’ agreement

What are we talking about?

An actual document, titled “Shareholders’ Agreement”.

Every person who holds shares in the company needs to be a party to (sign) this document.

The company is also usually a party to the document.

It is a private document, with only the parties keeping copies.

If someone breaks a rule in the document, one or more of the other parties has to take the rule breaker to court to enforce it.

Why would the company be a party to an agreement between its shareholders?

The company is a party because:

• many of the things covered by the shareholders’ agreement document require it to act in a certain way,
• it would only be obliged to do those things if it signed the document, and
• it lets shareholders take action directly against the company if the rules are breached.

What does the shareholders’ agreement document do?

It creates legally enforceable rights and obligations for each party.

If a party breaks the rules of the document, the other documents can follow the procedures to fix the problem.

If all else fails, they can take the rule-breaker to court to enforce it.

How is a shareholders’ agreement document different from the term sheet/heads of terms?

Term sheets are non-binding indications of what each party is prepared to agree to, when the deal is formalised.

The shareholders’ agreement document is one of many documents that are required to actually formalise the deal.

It is common for terms to change between signing a term sheet and preparing the draft agreement.

Who needs to review and sign a shareholders’ agreement?

Each shareholder who owns shares in a company will need to review and sign the document.

The company’s directors will need to review and sign it on the company’s behalf.

PEDANTIC POINT

If new shares need to be issued (for example, to fulfil equity splits to co-founders) those new shareholders will also need to sign it.

Who has access to a shareholders’ agreement?

It is a private document. Only the parties to it (the shareholders, and each director of the company) should have access to it - especially the final signed copy.

In practice, advisors and countless others will have had access to it - the fact that it is ‘private’ only means it does not have to be publicly filed anywhere.

What should a shareholders’ agreement contain?

There is no standard form of a shareholders’ agreement.

Every shareholders’ agreement document will look different depending on who drafts it. As a minimum, it should create a legally binding, enforceable contract between the shareholders which:

• names the parties explicitly,
• clarifies how this private document interacts with the public articles,
• states who owns how many shares with information about any vesting schedules,
• lists what things should require consent before being done, and how consent is to be obtained, and
• creates obligations of confidentiality and restrictive covenants that relate to the company’s business.

What happens if a party breaches the terms of a shareholders’ agreement?

The other parties can sue for damages or specific performance (where the court forces them to do something).

Some provisions in a shareholders’ agreement might trigger automatic consequences, such as converting a person’s proportion of ordinary shares into deferred shares.

Does a copy of the shareholders’ agreement need to be filed or sent to anyone?

No.

How long does a shareholders’ agreement last?

They last indefinitely; until terminated by all the parties to it. In practice, a shareholders’ agreement evolves in two ways:

1. The shareholders’ agreement continues to be relied on. As the company has new shareholders come on board, they sign up to the existing agreement (using a document called a deed of adherence). This requires new shareholders to be happy with the existing document.

2. Powerful shareholders (usually investors or acquirers) come on board and require the existing shareholders’ agreement to be ripped up and replaced with a new one which better serves their interests. This is fairly common.

If the shareholders’ agreement is going to be ripped up why do we need it?

Operating a company under default company law is risky.

Consider how long it might take you to actually close a deal that would require a new shareholders’ agreement with investors to be put in place: 6 months? 12? What would you do if a 33% shareholder went quiet 5 months into the process?

Having a shareholders’ agreement in place that deals with the company as it exists today provides the reassurance you need.

What ongoing obligations typically exist under a shareholders’ agreement?

Ongoing obligations are obligations that each party needs to be aware of before signing the document. This is because they can arise at any time and in most cases require some action from the party. For example:

• getting permission before any reserved matters are carried out,
• keeping things confidential, and
• restrictive covenants for each individual.

What happens if someone breaches an ongoing obligation?

Ongoing obligations should be sufficiently detailed, providing a full and clear process to follow.

Ultimately, the upset shareholders (or company) can enforce the obligation in the same way as any other breach - by going to court.

Can a shareholders’ agreement be amended after signing?

Yes, but only if everyone who originally signed it agrees to this.

PEDANTIC POINT

Some shareholders’ agreements allow the document to be varied if a certain percentage of shareholders agree.

This can be appropriate where there are a lot of shareholders involved (for example, multiple angel investors) who are low-touch and often take a while to respond to queries. A lower threshold (such as 90%) can help avoid delays. But this can be risky for the minority, who lose a significant amount of power by allowing this.

New articles of association

What are articles of association?

A company’s articles of association (rules) are contained in a document titled “Articles of Association” or similar.

Every UK company has to have articles of association.

Companies are incorporated with the default articles of association, commonly known as the model articles.

What are the model articles?

The model articles are the default articles of association that a UK company has when it is incorporated.

You can read the model articles for private companies here. They were last updated in 2013.

The model articles were written to apply to as many small companies as possible, and so are fairly limited. For example:

• they give directors very broad powers,
• they have minimal protections in place for shareholders, and
• the rules governing how shares are transferred are very basic.

They are not really made for startups.

How do I know if my company is using the model articles?

If you don’t know, and your company was incorporated recently, then it most likely is using the model articles.

You can verify this by going to the Companies House website and searching for your company. Type in your company’s name and hit search, then select it from the results. Click on the ‘filing history’ tab. The oldest chronological entry (at the bottom) will probably say ‘Model articles adopted’ in its description.

Do new articles override the model articles completely?

Yes. Each time new articles are sent to Companies House, those are the definitive articles for that company that are in force.

PEDANTIC POINT

If you actually read a set of new articles, you’ll commonly see wording along these lines:

The model articles shall apply to the company, except where they are varied or excluded by or are inconsistent with the articles contained in this document

If the articles are completely overridden, what is going on here? Why are we referring to them applying?

Well, the model articles are actually quite well written and cover a wide range of basic situations fairly well. In most situations, it does not make sense to override those already established procedures. So when new articles are drafted, it’s common to conceptually take the model articles as the base document, then have the new articles override the parts that are inconsistent.

This results in a significantly shorter individual document, but it does mean that when you read it, you also need to refer to the original document - and understand which parts of it are no longer applicable!

In any case: this still results in the previous articles being completely overridden by the new ones.

Is this pedantic enough for you?

Why do we need new articles of association when putting together a shareholders’ agreement?

There is no legal requirement to adopt new articles of association when putting together a shareholders’ agreement. But it is very common to do it. Why?

• We know the shareholders’ agreement can create rights and obligations, but these are only contractual and can be hard to enforce.
• The articles are different. Since they are governed by company law, failure to adhere to them does not usually require going to court.
• Instead, if someone does not behave in line with the company’s articles, the action they took is invalid.

This means it makes sense to include certain things in the articles (such as procedures to be followed if someone’s shares are being transferred) and other things in the shareholders’ agreement (what an individual’s vesting schedule is).

Are new articles a legal requirement when adopting a shareholders’ agreement?

No. A shareholders’ agreement can be effective without modifying the articles. But doing this can lead to conflicts between the existing (usually model) articles and the adopted shareholders’ agreement - especially where there is an overlap between procedural rules that appear in both.

Who needs to review and sign the new articles of association?

Everyone who is involved in the company (directors and shareholders) needs to review the articles.

Nobody needs to sign them.

How are new articles actually adopted if nobody has to sign them?

Articles are adopted by the shareholders passing a special resolution to adopt new articles.

The (condensed) process is:

• the directors have new articles prepared,
• the directors propose a special resolution to adopt the new articles,
• the directors circulate the special resolution along with the new articles,
• if 75% of the shareholders agree, the resolution is passed and the articles are adopted.

PEDANTIC POINT

The process above is what applies under default company law. If your company already has a shareholders’ agreement in place, you may need to obtain further contractual consent to adopt the new articles, which is typically one of the reserved matters.

What is the typical structure of new articles of association when putting together a shareholders’ agreement?

Most custom articles will take the model articles as a ‘base document’.

The new articles will list each provision in the model articles that is inconsistent, disapplying or varying them as required.

What happens if there is a conflict between the shareholders’ agreement and the new articles?

The shareholders’ agreement usually takes priority. But this has to be written in the shareholders’ agreement or articles for it to be true.

Why do some things go into the articles? Where does this requirement arise?

The Companies Act 2006 requires every company to have a set of public articles of association.

The articles are intended to contain formal rules that are legally effective and bind everyone involved in the company.

Certain things have to go in the articles. For example:

• the rights that shares have (can the holder vote?),
• restrictions on selling or transferring shares, or
• rules for appointing and removing directors and how they make decisions.

Everything that doesn’t need to go in the articles usually goes in the shareholders’ agreement.

The only exception is where something that normally goes into the articles is commercially sensitive - but this is not common for early stage startups.

What happens if something appears in the articles when it should be in the shareholders’ agreement and vice versa?

The question is “can you enforce it?” If it’s ineffective or unenforceable in the way you intend it, this can lead to disputes and a failure to bind everyone it needs to bind.

What happens if someone does not follow the articles?

Invalid decisions taken by the company, possible litigation, possibly personal liability for directors.

Can the new articles be changed going forward?

Yes, but changing the articles requires a special resolution (where 75% of the current shareholders agree to change them). Most shareholders’ agreements will also explicitly list changing the articles as one of the reserved matters that requires further consent beforehand.

At what point do the new articles take effect?

They take effect at the moment the special resolution proposing their adoption is passed. They do not need to be sent to anyone for them to have legal effect.

Who do the new articles need to be sent to and by when?

To Companies House, within 15 days, including a copy of the special resolution that authorised them being adopted.

Companies House allows articles and special resolutions to be submitted using the generic upload a document to Companies House service.

Who is responsible for filing the new articles?

Ultimately it is the company’s responsibility. But this means it is the directors (or secretary - if there is one) who need to actually do it.

What are the consequences of not filing new articles with Companies House?

Legally, this is a breach of the Companies Act 2006 and is a criminal offence - the typical penalty is a fine.

Commercially, failure to file important documents on time can be a red flag for anyone looking at your company’s history - banks, investors, acquirers. It can also delay transactions until the problem is remedied.

In reality, Companies House usually allows articles to be filed late and fines are rarely issued.

Subscription letter / agreement

What is subscription?

In company law, subscription is the process of creating new shares in a company.

A person who subscribes for new shares is usually referred to as a subscriber.

Technically:

• the subscriber applies to the company for X shares at £Y per share, and
• the company accepts the application and issues new shares to the subscriber.

PEDANTIC POINT

Even more technically, the company first allots the new shares before they are issued to the person:

• Allotting is the company’s decision to give this person shares (creating an implicit contract to issue them).
• Issuing is actually giving them to them (entering them in the register of member, issuing shareholders).

Why not transfer shares rather than issue new ones?

Issuing new ones keeps the cap table clean and allows you to trace the history of ownership with relative ease.

Consider this example:

• Odette holds 100 shares in a company.
• She wants to give Mandeep 20 shares, so she has 80%.
• She transfers 20 shares to Mandeep and retains 80.

All seems fine. But note:

• The company’s statutory books (in particular, its register of members) need to record a chain of title. Transferring shares requires a significant amount of paperwork. Over time, multiple transfers create a long and messy history.
• Transferring shares might trigger something unexpected in the existing articles.
• Any change in the value of the shares since Odette was first issued them and the date they are transferred might trigger tax issues for both of them.
• The cap table becomes messy and details reallocations rather than a clean trail of newly created shares.

Contrast this with issuing new shares instead:

• When the total number of shares is 125:

  • Odette still holds 100 shares (80%), and
  • Mandeep holds 25 shares (20%).

• There are no unavoidable tax issues and the cap table stays clean.

  PEDANTIC POINT

  What does unavoidable tax issues mean?

  There is a potential tax issue that relates to ‘restricted securities’ in UK companies. If a shareholder holds restricted securities, they might end up paying more tax than they should.

  This is an issue that can be avoided by completing a section 431 election.

What is a subscription letter?

It is a contract (disguised as a letter) from a subscriber to a company, where the subscriber applies for new shares and the company accepts the application. It is signed by both parties. It looks like letter because this is the simplest way to document a simple subscription.

What makes a subscription simple or complicated?

Subscriptions are simple when nobody has any extra demands before the subscriber pays for the shares and they are issued.

A subscription can be complicated when:

• there are multiple people subscribing at the same time (everyone has to be in sync),
• the subscribers are actually investors who have extensive requirements before subscribing (due diligence), or
• the company (or its shareholders) are expected to provide warranties about the company (guarantees against being ripped off).

What is a subscription agreement?

A subscription agreement is a more comprehensive contract that usually deals with multiple people investing at the same time.

When would you use a subscription letter versus a subscription agreement?

Subscription agreements are commonly used during investment rounds (the investors are the subscribers). They:

• are much more detailed and significantly longer than a subscription letter,
• legally oblige the company to follow the correct processes,
• contain extensive warranties about every aspect of the company, and
• should be clear about what the cap table looks like after the shares are issued.

Do we always need a subscription letter / agreement?

You only need a subscription letter or agreement if new shares need to be issued.

For the type of shareholders’ agreement we are discussing in this guide (one without investors), this would only be in order to fulfil an equity split.

Who needs to review and sign a subscription letter or agreement?

• Subscription letters are signed by the subscriber and the company (individual documents).
• A subscription agreement is signed by all subscribers (a single document).

Are subscription agreements only necessary when investors are involved?

No. Subscription agreements are useful when you need more detail about the process of issuing shares, or where any of the shareholders (whether they are investors or not) requires something to be done before, during or after the process of subscribing.

What should a subscription letter contain?

At a minimum, a subscription letter should contain wording like this:

I, Peppa Pig, hereby apply for the allotment and issue of 100 new ordinary shares in the capital of the company.

and

Please indicate the company’s acceptance of this application by signing and returning a copy of this letter to me.

What should a subscription agreement contain?

A subscription agreement usually has 3 main components:

1. the subscription process - mirroring the wording that would appear in a letter,
2. how and when the shares should be issued - the actual steps to be taken by each party to complete the deal, and
3. having the existing shareholders warrant that a list of things is true - the warranties.

What are the most heavily negotiated terms that appear in subscription agreements?

Assuming the draft is fair and in line with the term sheet, the most heavily negotiated parts will be to do with warranties.

What is a warranty?

A warranty is a promise made under a contract. If the promise is not kept, the person on the other end might be entitled to damages.

What does a warranty look like?

A warranty should be a statement which the reader either agrees with, does not agree with, or needs to provide further detail about.

For example:

the company is not engaged in any litigation

What is a warranty in the context of a subscription agreement?

Imagine this:

• you are a celebrity,
• you’re interested in taking 30% of a startup that’s already got some traction,
• the founders are offering you shares at the base price, knowing you’ll add serious value.

You want to do it, but you need to be sure that the traction is real - you don’t want to put your face on something bogus.

You ensure that the subscription agreement contains appropriate warranties (promises) from the founders about the business, just in case you are being hoodwinked.

What type of warranties are expected to be given and by whom when putting together a shareholders’ agreement?

Any warranties asked for should reflect the reality of the company and its founders. For example:

• If the company sells software, the founders should promise that the company owns all intellectual property in the software.
• If the company sells a celebrity branded product, the founders might promise they have appropriate experience doing this type of work before.
• If the company sells professional services, the shareholders will probably promise that they have the appropriate qualifications to do so.

This level of detail is usually only needed when investors are involved. When putting together a shareholders’ agreement, only minimal warranties are necessary. For example:

• that the company has been properly incorporated,
• that the information given to the shareholder about the company’s ownership since then is accurate,
• that all taxes have been paid,
• that there isn’t any ongoing litigation, and
• that the software it relies on has been properly acquired and licensed.

These warranties are typically given by the company itself.

Sometimes, incoming shareholders will ask for the existing shareholders to also give the same warranties in a personal capacity.

What happens if you need to provide further details about a warranty?

Whenever you give warranties, you should be reading each one in detail. Remember, each one is a statement that you either agree with, do not agree with, or need to provide further details about. This is how I approach each one:

• Agree with: no action needed, you will agree to it when the document is signed
• Do not agree with: inform the person who drafted the agreement and ask for it to be removed
• Further detail needed: put it in a disclosure letter.

A disclosure letter refers to the warranty in question and provides the further detail needed. This is then considered as ‘disclosed’ to the new shareholders and can’t be a reason for breach of that warranty.

Do we need a disclosure letter when putting together a shareholders’ agreement?

If:

• new shares need to be issued, and
• you use a subscription agreement which contains warranties,
• and you think any warranty needs further details to be accurate. then you do.

PEDANTIC POINT

You could also amend the warranties to suit your custom situation. This often takes more effort to negotiate than it would to just have disclosed against it.

Does a subscription letter or agreement need to be filed or submitted anywhere?

No. Each one is a private document and should only be retained by its parties.

What has to be done after a subscription?

When new shares are issued:

• the company updates its register of members/cap table,
• the directors send share certificates to the new shareholders, and
• Companies House is informed using form SH01 within a month of the issue date.

Section 431 election

What is a section 431 election?

A tax form that helps you pay less tax if you’re an employee that has shares. It is actually called a section 431 joint election because it requires both the shareholder and the company to sign it.

Why is a section 431 election relevant in the context of putting together a shareholders’ agreement?

Section 431 elections are relevant because restricted securities are likely to be involved:

• where new shares are being issued to an employee, if shares are subject to vesting they will be restricted securities
• when restrictions are applied to shares that already exist, those shares also become restricted securities from that date

Restricted securities are taxed when they are acquired on the basis of their restricted market value. The unrestricted market value is likely to be higher - this difference remains as an untaxed percentage. You want to avoid having an untaxed percentage when there’s more money to be taxed (in other words, later).

This can be avoided by signing a section 431 joint election which shows that you both and the company agree there should be no untaxed percentage remaining.

How do we know if section 431 elections are needed?

Imagine this:

• An employee gets shares worth £10k (the unrestricted market value), but the vesting schedule (4 years, 1 year cliff) makes the market value only £8k (the restricted market value).
• Tax is calculated and paid on the restricted market value of £8k.
• The £2k difference becomes an untaxed percentage of 20%.
• Years later, the company is sold and those shares are now worth £100k.

Without a section 431 election:

• The law says that any untaxed percentage must be taxed at the higher income tax/national insurance rate.
• The 20% untaxed percentage is applied to the full sale value of £100k.
• This means £20k of the employee’s gain is subject to the higher income tax/national insurance rate.
• Only the remaining £80k is taxed at the lower capital gains rate.
• Result: employee pays more tax.

If a section 431 election had been made:

• The company and employee agreed when the shares were issued that tax should be paid on the entire £10k up front.
• There is no untaxed amount.
• The entire gain above the initial £10k value (£90k) is taxed at the lower CGT rate.
• Result: employee pays less tax.

A section 431 election is the form that the company and employee both sign that confirms they agree there should be no untaxed percentage. This form needs to be signed within 14 days of the shares being acquired by the employee.

Do I need an accountant to prepare a section 431 election?

No. HMRC makes the wording freely available.

What are the disadvantages of entering into a section 431 election?

If the value of the shares reduces after the election, the employee will have paid more tax up front that would have otherwise been due.

Why might someone choose not to sign a section 431 election?

An employee might choose not to make a section 431 election if their shares are subject to vesting.

For example:

• Emily is a minor founder in a startup (she holds 10%, the others hold 45% each).
• She is not sure if it’s going to work out, but she is willing to give it a shot.
• All of the founders’ shares will vest over 4 years.
• Let’s say the restricted market value of her shares is £1k (unrestricted value being £5k).
• If she signs the section 431 election, she pays tax on the full £5k.
• If she doesn’t sign it, she pays tax on the £1k restricted value only.

Since Emily is unsure whether she’s going to stick it out for the full years, she is probably better off not signing the election.

But if there is a chance that it all works out, and the company eventually sells for millions, she will have an untaxed percentage of 80%.

It’s up to Emily to decide what’s best for her.

Who has to sign a section 431 election?

The subscriber and the company both sign it.

Are section 431 elections only relevant for employees/directors receiving shares, or for all shareholders?

Section 431 elections are only relevant for shares that fall under the broader ‘employment related securities’ laws.

This means it is only relevant to shareholders who are employees or directors of the company.

What are the implications of entering into a section 431 election?

There are long lasting tax implications.

The biggest impact is that it transforms a future higher income tax and national insurance liability into a capital gains tax liability.

Capital gains are taxed at lower rates than income tax and national insurance.

There are 3 main implications of signing one:

1. your immediate income tax charge might be higher,
2. your future income tax risk is eliminated, and
3. all future growth is taxed as a capital gain.

It’s an immediate small tax cost paid now to avoid a potentially massive bill later.

What does a section 431 election look like?

They are usually simple 1 or 2 page documents. They can look like a form or be in letter format. They can also be integrated into other documents.

Here is HMRC’s example.

When must a section 431 election be made?

It has to be made within 14 days of the restricted shares being ‘acquired’ by the shareholder.

What does acquired mean in this context?

I haven’t seen any clear guidance about this, so my own interpretation is that ‘acquired’ doesn’t necessarily equate to ‘issued’.

I think this is important because:

• new restricted shares are obviously acquired (issued) to co-founders when equity splits are being fulfilled
• but where an existing shareholder has already incorporated a company:
  • those shares were already issued before any restrictions came about, and
  • the restrictions only have effect from the date of the new shareholders’ agreement, then
  • HMRC could argue that the restricted securities were acquired only on this date.

Essentially a person now has restricted securities when they didn’t before - I think that fits into the meaning of acquired

What are the risks of not signing a section 431 election at the right time?

Paying tax at a higher rate, on an untaxed percentage.

In other words, paying more tax than was needed.

Do we need to send a copy of the section 431 election to anyone?

No, the individual copy doesn’t need to be sent to anyone.

However, the company does need to report the fact that any shares were issued and section 431 elections were made in its annual employment related securities return.

How long should we retain copies of section 431 elections?

The company and the shareholder should each keep a copy for at least 6 years.

HMRC may need to see it if they carry out an audit or compliance check.

If no copy of the election is available, it won’t be valid.

Can a section 431 election be combined into a subscription letter or agreement?

Yes. HMRC has confirmed that ‘other formats’ are acceptable:

HMRC does not require the approved election forms to be used or agreed as part of a single or dual-part document so long as it can be shown that the relevant employee and employer have agreed whether by email, in a share subscription agreement or otherwise the key terms of an election in no less detail than the written form of election supplied by HMRC.

Why do this?

• one less document per person,
• the election is made on the date of the letter or agreement,
• the shares the election relates to are clear,
• the letter or agreement itself is the copy required to show HMRC.

Shareholders’ resolutions

What are shareholders’ resolutions in the context of shareholders’ agreements?

Shareholders’ resolutions document the formal permission of the company’s existing shareholders for the company to do something.

Remember, shareholders’ resolutions can either be ordinary (require > 50%) or special (require > 75%).

Putting together a shareholders’ agreement typically involves 3 actions that require permission:

1. issuing new shares (ordinary),
2. turning off pre-emption rights in relation to the new shares (ordinary), and
3. adopting new articles (special).

Shareholders’ resolutions are usually obtained as written resolutions.

What are written resolutions?

Shareholders can pass resolutions at meetings, or they can pass them in writing without holding a physical meeting.

For resolutions to be passed in writing:

• the proposed resolutions have to be sent to every shareholder on the same day,
• the required threshold needs to sign it (ordinary or special),
• signatures have to be back within 28 days, but
• if the required threshold comes back before then, you don’t need to wait the full 28 days.

Written resolutions make more sense nowadays.

When might we hold a meeting between shareholders rather than passing written resolutions?

Written resolutions do not:

• allow a shareholder to abstain from a vote - meaning the threshold is calculated based on the total shareholders and who actually responds,
• allow for open discussion of a particular resolution before asking for a show of hands - everyone considers written resolutions in isolation,
• allow for individual resolutions to pass or fail - they are all or nothing, and
• allow a director or auditor to be removed.

Meetings make more sense when there is actual discussion to be had.

They also make more sense where voting thresholds need to be taken into account. At a meeting, majority is calculated based on the votes actually cast (abstained are excluded). If you know certain shareholders may be hard to reach or unlikely to vote, it might be easier to pass a resolution at a meeting where their non-participation is not an issue.

Who needs to be sent copies of the resolutions and who needs to sign them?

They need to be sent to every eligible shareholder on one date (usually called the circulation date).

Each shareholder needs to sign and return the document within 28 days for it to count towards the decision.

Which resolutions are typically required when adopting a shareholders’ agreement?

If shares are being issued as part of the implementation, the directors will need the shareholders to approve:

• an ordinary resolution to issue the new shares, and
• any pre-emption rights (the right to also receive new shares in proportion to existing ownership) are disapplied.

PEDANTIC POINT

Section 550 of the Companies Act 2006 allows companies with a single class of shares (ordinary being the default) to allot new shares without getting shareholder authority (provided the articles allow this - which the default model articles do).

Similarly, section 569 allows companies with a single class of shares to allot new shares as if the pre-emption rules did not apply.

This means it is possible for a company with only ordinary shares, using the default articles, to validly issue new shares without obtaining the shareholder resolutions.

But in practice, most companies will obtain them anyway. This is because:

1. it future proofs the company in case a second class of shares comes into existence,
2. it provides certainty and clarity about what processes were followed - good for due diligence,
3. specific resolutions can be broader and be more flexible than this fallback law, and
4. it is the standard way of doing things.

If new articles are being adopted, they will also need a special resolution to be passed.

What should shareholders’ resolutions look like when putting together a shareholders’ agreement?

Shareholders’ resolutions appear in a single document.

The document should specify that these are resolutions of the eligible members of the shareholders.

It should clearly list each proposed resolution, noting whether it is ordinary or special.

It should be clear that the directors are proposing these resolutions to be passed, and that the shareholders’ signatures are now required.

It should provide instructions about how and when to return the resolutions.

What is the process for getting shareholders to approve the resolutions?

The proposed resolutions are usually sent out to the eligible shareholders along with all the other documents that relate to them.

This is the circulation date.

They then have 28 days to approve the proposed written resolution.

Even if you obtain 75% of the signatures by day 21, it might still good manners to wait the extra 7 days for the remaining shareholders to provide their responses. You don’t want them to feel excluded.

What are the implications of not passing the correct resolutions?

For new shares being issued:

• if authority is legally required, but knowingly not obtained, that is a criminal offence by the directors with personal liability,
• but the allotment itself is still valid - and the new shareholders are still valid owners.

For disapplying pre-emption rights:

• failure to do this creates a civil liability - which means the company is liable and each director is personally liable
• but the allotment itself still remains valid here too.

Where new articles are being adopted:

• the old articles remain in force, and
• there’s no criminal offence.

Do we need to send copies of the resolution to anyone? If so, by when?

Copies of written resolutions need to be sent to Companies House within 15 days of the date they are passed.

You do not need to send the signature pages - only the text of the actual resolutions needs to be sent to Companies House.

In practice, people often just send the whole thing anyway.

What happens if resolutions contain commercially sensitive information?

Section 29 of the Companies Act 2006 requires “a copy of the resolution” to be filed with Companies House, even if it contains commercial sensitive material.

This means:

• redacted parts are not permitted,
• you need to keep sensitive matter out of the resolution itself where possible,
• the resolution can cross reference other documents where sensitive information is contained, and
• if further detail about a resolution needs to be recorded, this can go in the board minutes (not filed).

Board resolutions

What are board resolutions in the context of a shareholders’ agreement?

Board resolutions formally record the decisions made by the company’s directors.

They also allow the board the carry out tasks on behalf of the company, such as those outlined in a subscription agreement.

Board resolutions can be passed at a meeting of the board with a show of hands, or they can also be passed as written resolutions.

Should directors hold a board meeting or pass board resolutions as written resolutions?

For transactions, written resolutions are quick - but they require unanimous consent. This means additional signatures may be required if there are multiple directors.

Board resolutions passed at a meeting only require a majority vote. These decisions are recorded in board minutes.

What are board minutes?

Board minutes are a record of a meeting of the board.

The board doesn’t actually have to meet in order to agree on the contents of board minutes. But they do serve as a detailed formal record.

Usually, only the chair of a company will sign the board minutes.

What is the difference between board minutes and board resolutions?

Board minutes record board resolutions within a wider narrative, providing context and explanation for the decisions taken.

Who needs to sign the board minutes or written resolutions when putting together a shareholders’ agreement?

If the board resolutions are to be passed as written resolutions, every director.

If the board resolutions are documented in board minutes, only the chair (or a single director).

Are non-director shareholders entitled to copies of the board minutes that relates to the shareholders’ agreement?

No, shareholders are not entitled to see board minutes (unless an existing shareholders’ agreement gives them this right).

However, incoming shareholders may ask for a copy to ensure that the company is following the correct processes.

Which board resolutions are typically passed when implementing a shareholders’ agreement?

Each document that the company needs to sign has to be considered and signing it needs to be approved.

If new shares are to be alloted issued, this needs to be approved and the directors are authorised to do what is required.

If new directors are being appointed or new service contracts are being put together for them, this also needs to be approved.

Resolutions are usually passed to make it clear what documents need to be filed by when and by whom.

How should we store and maintain copies of board minutes?

They should be stored in chronological order and kept private.

Nobody is entitled to see board minutes other than the board.

Copies will need to be shown to potential investors or acquirers.

What happens if there is a mistake in the board minutes? Can they be amended?

Board minutes record what happened at the meeting itself. So a mistake in the minutes does not invalidate any actual decision, provided that decision was actually made.

If amending them is necessary, this can be done at the next board meeting, or corrected by written resolution. You could even add supplementary minutes to the original ones.

The key thing is not to just rewrite and bin the originals.

What happens if a shareholders’ agreement is put together without proper board resolutions being passed?

The shareholders’ agreement document itself will probably still be valid. But if the company is a party to it:

• it may not have had the right approval to sign it (but this can be ratified later), but
• actions taken on the basis of the new agreement may be void.

The process to be followed

What are you trying to achieve?

The goal is for each person who should be a shareholder, to be a shareholder.

Once they are a shareholder, they need to be signed up to the shareholders’ agreement.

At the same time, the company needs to adopt the new articles.

You want this to be done as cleanly as possible.

One person needs to drive this job. Agree who that will be first.

What is the process?

We covered this above in depth above. In short:

1. The shareholders need to discuss and agree the main terms, recording them on a term sheet.

2. The term sheet is used as the basis of the documents. Use Robolawyer or instruct a real one to produce them.

3. Each shareholder will have specific instructions and need to be sent specific documents. For example:

   • a person being issued new shares might be sent:

     • the draft shareholders’ agreement,
     • the draft new articles, and
     • a combined subscription letter and section 431 election.

   • whereas, an existing shareholder who is not a director might only be sent:

     • the draft shareholders’ agreement,
     • the draft new articles, and
     • the draft shareholders’ resolutions (because their approval is needed).

   • or, a shareholder who is also a director who would be sent:

     • everything that relates to them as an individual, and
     • everything that relates to the company.

4. Each party is given the chance to review the documents, comment on them and propose any changes. This is the point at which delays can arise, especially if individual parties then appoint their own advisors.

5. At some point, everyone will align and be prepared to sign the documents. Once signed and dated, the deal is done.

What is the first thing that needs to be done?

The person in charge needs to lead discussions about the terms between shareholders. The shareholders then come to an agreement on how the company should be structured and run. The person in charge prepares a term sheet to document the initial agreement.

What do we do with the term sheet?

Use Robolawyer to run the rest of the deal. Or give it to a lawyer who has experience doing this type of work before. Don’t try and do it yourself by filling out a template or by using Chat. It won’t be fit for purpose.

What’s the best way to share documents with the shareholders?

Identify who needs to be sent what. For example: directors will need to review board minutes. Existing shareholders will need to sign shareholders’ resolutions. New shareholders will want to see a subscription letter or agreement. Everyone needs sight of the articles.

Prepare individual emails to each party, explaining what each document is and why it needs to be signed.

Should we engage a lawyer or other advisor to help us deal with this?

If you’ve managed to make it this far down this guide, and you’re thinking ‘it doesn’t seem too hard’, then you probably don’t need a lawyer to guide you any further.

If you would rather offload everything, then maybe a lawyer or other advisor will add some value.

But even if you engage a lawyer, you will be doing most of the heavy lifting. This is because:

• you will have an existing relationship with your fellow shareholders and are best placed to communicate with them directly rather than via a lawyer, which is impersonal,
• as a founding or majority shareholder, you may want to direct how things should be set up and structured, and
• lawyers will typically charge a great deal more to do this work on your behalf - and you probably don’t want to spend that cash.

Do documents need to be sent to everyone all at once?

When putting together a shareholders’ agreement, yes, it makes sense to share everything all at once. You want everyone to be on the same page and have an equal opportunity to see and review the drafts.

How long should I give people to review documents before following up?

A week between nudges is reasonable. But remember, shareholders resolutions expire after 28 days of the circulation date that appears on the draft shareholders’ resolutions that you sent out. If you left them undated, that’s one less thing to worry about.

What kind of response should I expect after sending out documents for review?

It depends who prepares your initial drafts and how accurately they represent the term sheet that was agreed in principle.

If you use Robolawyer to prepare your term sheet and drafts, the number of comments and proposed amendments is often zero. This is because our drafts accurately represent each term, spread across the entire suite of documents you need, drafted in the correct way, so that they are legally enforceable and actually useful.

If you use a law firm, your results may vary depending on how much you paid and how experienced your lawyer is, and whether they’re actually representing you (so you don’t do anything at all) or as is more commonly the case, advising you in the background.

If you are running it yourself, you will need to keep track of each party’s comments individually, deciding when is the best time to make any changes and re-share all of the documents with everyone again.

How long should it take to complete a shareholders’ agreement?

Discussing and agreeing terms can take some time - and I think this is the right approach. The terms contain the essence of the agreement between everyone. There usually comes a point where you just know that everyone is aligned. I don’t think there is any point engaging a lawyer until you are there.

The remainder of the process shouldn’t take as long. Could be days or weeks, is often months. How long it takes - totally up to you.

How should people sign the documents?

Most people use Docusign or similar services or insert digital signatures into pdf files and send those back.

Some people still print, sign and scan (or send a picture) of the signature page.

Ask people to attach the entire original document when sending you signed signature pages by email. This avoids confusion about which version of the document the signed page belongs to.

What do I do with all the separate signed copies of documents that each party has emailed me?

You will need to assemble a single, final dated copy of the document which contains the main text and each person’s signature.

This is usually done by dragging and dropping pages in and out of pdf files.

What date should be put on the documents?

Ideally this should be the date (or soon after) that the shareholders’ resolutions are passed.

In practice, lawyers ask for documents to be left undated. This gives the parties more time to consider the proposal ‘unofficially’.

The documents are then usually dated on a single date, known as the completion date or closing date.

Do we need to keep wet ink / hard copies of documents?

No legal obligation, but I would suggest keeping at least one as an offline backup.