Most business owners bring in investors or enter into transactions that involve giving up a portion of their ownership.
However, as the person driving the business, control does not always move in tandem with shareholding. A Shareholders’ Agreement (SHA) is commonly used to ensure that founders retain company-level control even where capital transactions dilute their ownership.
Control under the Companies Act 2016
In the absence of a SHA, control of a company is determined by voting thresholds under company law.
Generally:
- decisions requiring a simple majority are passed with more than 50% of voting rights
- decisions requiring a special majority require at least 75% approval
In practical terms, once a founder’s ownership:
- falls below 75%, they lose control over matters requiring special resolutions (i.e., constitution amendment, dissolution, capital reduction, etc.)
- falls below 50%, they no longer control ordinary resolutions
This situation commonly arises during fundraising rounds where new investors are introduced and shareholding is diluted over time. It may also arise in M&A transactions where founders transfer part of their shares to incoming investors or strategic buyers.
Key clauses for founder protection
Without additional structuring, control will follow ownership.
To address this, a SHA is typically put in place once there is more than one shareholder to regulate how key decisions and governance matters are managed as ownership evolves.
Below are some key clauses that can help protect founders where their shareholding shifts over time.
| Clause | How It Protects Founders |
| Reserved matters | Certain key decisions require founder’s consent regardless of shareholding |
| Veto rights | Allows founders to block specific actions even without majority control |
| Board composition | Ensures founder’s representation at board level |
| Quorum requirements | Requires founder’s presence for board or shareholder meetings |
| Drag-along rights | Typically allows majority shareholders to force a company sale, but can be structured with thresholds or conditions to protect founder’s participation |
| Deadlock resolution | Provides mechanisms to resolve disputes where shareholders are unable to agree (e.g. buyout or escalation processes) |
The suitability and scope of these clauses depend on the company’s structure, funding plans and commercial negotiations between shareholders or investors.
Other safeguards
In addition to having a SHA, it is equally important to:
- maintain a cap table to track and plan how ownership changes over time
- ensure the company’s constitution is aligned with the SHA to ensure enforceability and prevalence of SHA terms
As a SHA is subject to negotiation, there is no guarantee that all proposed protections will be accepted by incoming investors. This makes forward planning critical.
By maintaining a cap table and modelling different funding scenarios, founders can better understand how their ownership may be diluted across multiple rounds and make informed decisions before entering into transactions.
Having both a properly structured SHA and a well-maintained cap table allows founders to manage both control and ownership as the business grows.
Let ELP draft your Shareholders’ Agreement
It is best to ensure that the requirement for a Shareholders’ Agreement, together with key commercial terms, is addressed at the term sheet stage so that key rights are established from the outset before the transaction is completed.
