Shareholders’ agreements – a jargon busting guide

corporate law jargon buster

Company law is full of legalese and unfamiliar jargon, meaning it can take time to understand and get to grips with some of the terminology found in shareholders’ agreements. Here’s our jargon-busting guide to help you through.

Shareholders’ agreement

Sometimes called an investment agreement, subscription agreement or founder agreement, this is an agreement made between the shareholders of a company and, in some cases, the company. They can be required in a number of situations, including:

  • In a private limited company with multiple shareholders to set out, amongst other things, terms governing the relationship between the parties, issue and transfer of shares and directorships
  • Where investors wish to place certain obligations on (often) founder or managing shareholders
  • In a joint venture to deal with the ongoing relationship of the joint venturers as shareholders in the joint venture company, and covering such issues as appointment of directors, distribution policies and reserved matters for shareholders
  • In a management buyout transaction where the seller of the company is retaining a shareholding

Articles of Association

A detailed document setting out the internal constitution of a Company. The articles will include information such as to the rights of its shareholders, how board meetings and general meetings of shareholders are to be conducted and the company’s borrowing powers.

A company can either have bespoke articles or model articles. Unless otherwise stated, all companies incorporated since 28 April 2013 will use the “Model” articles of association, these being the standard default articles prescribed by the Companies Act 2006.

Good Leaver

Where shares held by an employee can be bought back by the company or purchased by the other shareholders at a beneficial value provided the employee leaves for a defined list of ‘good’ reasons, such as ill-health or redundancy.

Bad Leaver

Where shares held by a person who ceases to be an employee of the company for a defined list of ‘bad reasons’ (such as dismissal for misconduct) can be purchased for less than their market value or issue price.

Restricted Securities

Employment-related securities that are subject to certain kinds of provision that reduce their market value. Shares held by employees in private companies will often be restricted securities because of good and bad leaver provisions in the articles of association.

Ordinary Shares

Basic voting shares in the equity of a company. An ordinary share will usually carry voting rights and will entitle the holder of the share to dividends if declared. The Articles of Association of a company will detail the rights which apply to ordinary shares.

Preference Shares 

These shares rank ahead of other share classes (such as ordinary) when it comes to dividends and/or returns of capital and are usually fixed-income shares. The Articles of Association of a company will detail the rights which apply to ordinary shares.


A distribution of a company's post-tax annual profits made to its shareholders. Dividends are usually paid in cash but can also be satisfied by the transfer of non-cash assets or by shares in the company itself. A dividend can be:

  • Dividend in specie: also known as a dividend in kind. A dividend which is paid by transferring assets other than cash.
  • Interim dividend: Interim dividends are in most cases decided solely by the board and are distributed either quarterly or after the first six months of the company's financial year. Interim dividends are usually, but not always, smaller than the final dividend.
  • Final Dividend: These are paid once a year and are calculated after the annual accounts have been drawn up. These are typically declared by shareholders following a recommendation from the board of directors.
  • Preferential dividend: A dividend which the shareholder is entitled to receive ahead of the payment of dividends on other classes of shares.


Where a person acquires the unconditional right to be registered as a shareholder of new shares in a company. Allotment precedes the issue of shares, which is the act of the company issuing the allotted shares to a shareholder.

Restrictive Covenant

A clause which restricts the way in which a shareholder can act, for example, restricting a shareholder from being employed by a competitor of the company for a specific length of time after ceasing to be a shareholder.


An undertaking in the context of an agreement is a promise to do or provide something, or to refrain from doing or providing something. This promise is intended to be binding on the party giving the undertaking.

Entire Agreement Clause

This provides that the written agreement to which it relates is the only agreement between the shareholders in respect of its subject matter and that any other documents or promises, statements etc made before the agreement are superseded.


Someone who has the legal right to act on your behalf.

Share Buyback

A purchase by a company of its own shares.  The shares can either be cancelled or held in treasury (which means that the company holds shares in itself).

Conversion Rights

Rights to convert a type of share, such as the right to convert a preference share to an ordinary share.

Drag Along Clause

A right for a certain percentage of shareholders (usually a majority) who want to sell a company to force other shareholders (usually a minority) to participate in the sale.

Tag Along Clause

The right given to a certain percentage of shareholders (usually a minority) to sell their shares to third parties on the same terms as other shareholders (usually a majority).

Pari passu

A term which means every share (or shareholder) is to be treated the same.

Pre-emption rights

The right of a shareholder to have first option to buy/acquire a new issue of shares or shares offered for sale by another shareholder. Details as to pre-emption rights (and whether they can be disapplied) are normally set out in the company’s Articles of Association.


A situation where decisions relating to the business cannot be taken because the shareholders cannot agree and no party can force a decision (either because they don’t have a majority or because a party has a right of veto) and the shareholders’ are unable to reach agreement on the way forward.

 Deadlock Provisions

A provision which intends to avoid a Deadlock taking place or resolving a Deadlock by forcing a share sale/purchase to take place. Two common deadlock clauses include:

  • Texas Shoot-out: The initiating party serves notice to purchase the shares of the receiving party, at the price set out in the notice. The receiving party then serves a counter notice, agreeing to sell their shares at the price stated in the notice or to buy the shares of the initiating party. The offer made to buy the shares must be at a higher price than originally provided by the initiating party. If both parties wish to buy then a bid will take place, the person who bids highest will be entitled to buy the other out.
  • Russian Roulette: Any party to a deadlock can serve notice on the other requiring them to either purchase the initiating party’s entire shareholding or sell their entire shareholding, at the price determined in the notice. The receiving party can either accept or reject the offer. If the offer is rejected, the receiving party will sell its shares to the initiating party. 

The Thrings Corporate Team support businesses of all sizes with comprehensive, jargon-free legal advice on a full range of matters including shareholders’ agreements. For more information see here.


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