Shareholders Agreement: equal 50/50 shareholders

When do I use this docuement?

• for a company owned equally (50/50) by two shareholders
• for joint decision-making and equal control and other rights for the shareholders
• for a private limited company incorporated in England and Wales

What are the key features?

• full form shareholders agreement
• 30 clauses and 3 schedules over 30 pages
• each shareholder to hold an equal number of separate classes of share
• clauses relating to the following matters:
  • business of the company
  • shareholder roles and services
  • shareholdings
  • funding
  • director appointment rights and board decision-making
  • shareholder decision-making
  • rights to dividends
  • matters requiring prior approval of specified shareholders (reserved matters)
  • future share issues
  • transfers of shares, including permitted transfers, pre-emption rights, compulsory transfer events, drag-along rights and tag-along rights
  • shareholder information rights
  • shareholder restrictive covenants
  • duration and termination

What else do I need to know?

Shareholder deadlock

Having equal owners in a company usually results in the consent of each shareholder being required for major decisions and other matters, with neither shareholder having a majority or casting vote.  This creates the risk of a deadlock situation arising if the shareholders are unable to agree on a particular matter or course of action.  This disagreement can relate to important material matters but could also apply to less important or trivial decisions which the company may need to take in its day to day business operations.

How should a shareholder deadlock be managed?

Shareholders often want the shareholders agreement to contain a mechanism for resolving a potential future deadlock between them.

Potential mechanisms include:

• defining (and limiting) which matters may give rise to a deadlock if they are not jointly approved
• one or more occasions for the potential deadlock matter to be discussed and considered by the shareholders (either as shareholders or directors) before a deadlock will be considered to have arisen
• a cooling-off period before the deadlock mechanism can be triggered
• referral of the deadlock matter to the senior management of the shareholders (if the shareholders are companies) and/or an independent third party or mediator
• a share buyout clause (known as a “Russian roulette clause)
• if the deadlock remains unresolved for a period of time, the compulsory sale (after a marketing process) or liquidation of the company

When negotiating a deadlock mechanism, it is important to bear in mind that the deadlock mechanism will apply equally to both parties as shareholders.  In the case of a Russian roulette clause, either shareholder may find itself in the position of having to decide whether it is the party which triggers the process by stating the share price or the party which has to elect whether to buy or sell at the stated price.

Often, having considered the alternatives, parties decide not to include any specific provisions in their Shareholders Agreement to deal with a deadlock.  This means that, should a deadlock arise, it is in their interests as owners of a business to resolve it by negotiation and agreement at the time,

What is a Russian roulette clause?

A Russian roulette clause works as follows:

• after a defined deadlock situation has arisen and remains unresolved, one shareholder has the right with a specified period to service notice on the other shareholder stating a specified cash price at which it is willing either to buy the other shareholder’s shares or to sell its own shares to the other shareholder
• the other shareholder must then elect either to sell its shares or to purchase the first shareholder’s shares at the price stated by the first shareholder
• once commenced, the process cannot usually be stopped unless both parties agree to do so
• the deadlock is resolved by the share sale and purchase of shares, resulting in one of the shareholders becoming the owner of all of the shares in the company

What other documents are available?

For a Shareholders Agreement for a company with majority and minority shareholdings, see

• Shareholders Agreement: majority/minority shareholders