Three people start a recruitment business. Equal thirds, because that is how they see it. Two years in, one of them has a child and drops to two days a week, which nobody objects to out loud. A year after that he has effectively stopped, and he still owns a third of a company now worth something.
There is no document that says what happens. The other two can buy him out if he agrees a price, and he does not have to agree a price. They can take dividends, but any dividend they declare goes a third to him. They can pay themselves more in salary, which starts to look like a strategy and eventually looks like unfair prejudice. What they cannot do is get him out, because nobody wrote down what leaving means.
The articles cover the company, not the relationship
Most small companies adopt the model articles at incorporation because that is what the form offers. The model articles are perfectly serviceable constitutional plumbing. They say how directors take decisions, how shares are transferred, how meetings work.
They are silent on everything that actually goes wrong. They do not say a departing shareholder must sell. They do not say at what price. They do not say what a shareholder is expected to contribute, or what happens if they stop. They do not protect a minority holder from being outvoted on everything, and they do not protect a majority holder from a minority who blocks a sale.
The articles are also public. They sit on the Companies House register for anyone to read. A shareholders agreement is a private contract between the shareholders and, usually, the company, and it can contain commercial terms you would rather not publish, such as valuation mechanics and salaries.
The two documents work together. Where they conflict, the position is messy, so competent drafting amends the articles in the places that need it and leaves the rest to the agreement.
Leaving is the clause that earns the fee
The core of any small company shareholders agreement is compulsory transfer: the circumstances in which a shareholder must offer their shares for sale, to whom, and at what price.
The common trigger events are ceasing to be employed by the company, death, long-term incapacity, bankruptcy, and material breach of the agreement. A good agreement distinguishes between them rather than treating every exit the same.
That is what good leaver and bad leaver provisions do. A good leaver, typically someone who leaves through ill health, redundancy or by agreement, receives fair value for their shares, usually determined by an independent valuer if the parties cannot agree. A bad leaver, typically someone dismissed for gross misconduct or who breaches restrictive covenants, receives less, sometimes the nominal amount they paid. There is often a middle category with a value that increases the longer someone has been there, which is really vesting by another name.
Death needs separate handling because the shares pass to the estate, and the surviving shareholders usually have neither the cash nor the desire to have a bereaved spouse as a business partner. The standard answer is a cross-option agreement backed by life policies: each shareholder is insured, the policy proceeds fund the purchase, and the option structure is used rather than a binding obligation for inheritance tax reasons. Business property relief is being reformed, with a limited allowance and partial relief above it from April 2026, so the tax side of this is worth revisiting with an adviser rather than relying on how it was structured a decade ago.
Pre-emption rights belong here too. They require that shares are offered to existing shareholders before anyone outside, which is what stops a stake in your business turning up in the hands of a competitor or an ex-spouse.
Drag and tag protect the two sides of a sale
Drag along and tag along are a matched pair and they exist because a buyer almost always wants 100% of a company.
Drag along lets a defined majority, often holders of 75% or more, compel the remaining shareholders to sell on the same terms to a genuine third-party buyer. Without it, a shareholder holding 5% can hold up a sale of the whole business until they are paid a premium to go away. The clause removes the hostage value of a small stake.
Tag along is the protection in the other direction. If the majority sell, minority shareholders can require the buyer to take their shares too, on the same terms and at the same price per share. Without it, the founders can sell their 80% at a good price and leave a minority holding an illiquid 20% of a company now controlled by a stranger.
Both clauses are boring to write and decisive when the moment comes. They are also the clauses most likely to be missing from an agreement downloaded from a template site, because templates tend to be written from the majority's point of view or the minority's, rather than both.
Deadlock needs a mechanism, not goodwill
A 50/50 company with no casting vote and no deadlock clause has no way of resolving a disagreement. The shareholders can neither pass an ordinary resolution nor remove each other, and the company simply stops being able to decide anything.
Options, in ascending order of unpleasantness: an escalation process, in which the dispute goes to the shareholders in person and then to mediation within a set number of days. A chairman with a casting vote, or an independent third director appointed for the purpose. And, if the deadlock persists, a buy-out mechanism.
The best known buy-out mechanism is the one where either party may serve a notice offering to buy the other's shares at a stated price per share, and the recipient may either sell at that price or buy at that price. It is self-policing, because naming a low price risks being bought out at it. It also favours whoever has cash, which is worth thinking about before you agree to it.
The alternative, when there is no mechanism, is litigation. A shareholder can petition under section 994 of the Companies Act 2006 on the grounds that the company's affairs are being conducted in a manner unfairly prejudicial to their interests, and the usual remedy is an order that their shares be bought at a valuation. In a genuinely deadlocked company there is also the just and equitable winding up petition under the Insolvency Act 1986, which ends the argument by ending the company. Both routes are slow and both cost more in legal fees than the agreement would have cost to write.
Write it at the start, while everyone is optimistic and nobody knows which one of them is going to be the problem.
Where this shows up in the game
Business Baron lets you take on partners and investors, and it holds you to what you agreed rather than to what you meant. A shareholder who stops contributing still owns their share. A minority holder can block things you assumed were yours to decide. Exits, deaths and fallings-out arrive as letters from people with their own view of what is fair. Partnership disputes tend to surface in the second or third year of a career.