This post is the third in a series on the legal aspects of running a startup in the UK. This section covers the Subscription and Shareholders Agreement or the “Shareholders Agreement” a key company document. These posts are only to be used as a guide to give you background information to enhance your understanding of the issues. You should always seek direct professional advise on all matters legal since the law is continually being updated and subject to case law in practice.

The Shareholder Agreement is associated with a specific investment round and describes the term and rules by which the investment is completed and the rights of the respective parties. However, these should always be seen alongside the Articles of Association since this document may modify the terms of the Articles. Where these documents are silent then the Models Articles and company law continue to provide direction. To avoid any confusion between these two agreements, the Shareholders Agreement should contain a “conflict between agreements” clause which removes any ambiguity.

Much of the document is standard template text but I would draw attention to the following:

  • the definitions should be well understood before reading the body of the document. Often the precise meaning of defined terms can be crucial to a complete understanding of a specific clause,
  • much of this document details the terms of the investment, the closing process and the warranties given by the company and managers,
  • additional sections will cover the board structure and voting rights, information rights, consent rights and restrictive covenants which all expand on the company operating rules set out in the Articles.  These conditions should be well understood by the executive team as they can have a material impact on the operations of the company and the conduct of the senior team,
  • there should be an “entire agreement” clause limiting claims on side or verbal agreements,
  • there should be a “variation” clause which give the threshold required to change this agreement.  Setting a high threshold can give blocking rights to groups of shareholders and this should always be checked before agreeing terms.

Some types of investor will require specific terms, a common example is SEIS and EIS based investors who will look to protect the qualifying status of their shares and the company (see articles on EIS).