“Most businesses do not fall out over the things they agreed. They fall out over the things they never discussed.”
Founders start out aligned.
Roles change as the business grows.
New investors, new priorities and new pressures arrive.
Without a clear agreement, every difference of opinion has to be resolved from scratch.
A well-drafted shareholders’ agreement sets out, in advance, how the business will be run and what happens when circumstances change. It turns potential disputes into agreed processes.
Seven Questions a Shareholders’ Agreement Should Answer
Who makes which decisions?
Day-to-day management usually sits with the directors. A shareholders’ agreement can reserve the most important decisions, such as issuing new shares, taking on significant borrowing or selling key assets, for the shareholders themselves.
What happens if a shareholder wants to leave?
Transfer restrictions and pre-emption rights determine who can buy the shares and on what terms, so ownership does not pass to someone the remaining shareholders never chose to work with.
What happens if a shareholder stops working in the business?
Illness, death, retirement or a breakdown in the relationship can all leave shares in the hands of someone no longer contributing.
Good leaver and bad leaver provisions set out what happens to those shares and how they are valued.
How will the business be funded?
Agreeing in advance whether shareholders are expected to provide further funding, and on what terms, avoids difficult conversations when the business needs capital.
How will profits be shared?
A clear dividend policy helps manage the different expectations of shareholders who work in the business and those who do not.
How will deadlock be resolved?
Where ownership is split equally, a single disagreement can stop the business from moving forward.
Deadlock provisions provide a route out before the disagreement damages the company.
What happens on a sale?
Drag-along and tag-along rights ensure a sale can proceed when a majority wish to sell, while protecting minority shareholders from being left behind on worse terms.
“Clarity agreed in good times prevents conflict in difficult ones.”
Why the Articles Are Not Enough
Every company has articles of association, but many owner-managed businesses rely on standard model articles that were never designed around their particular circumstances.
Articles are also publicly available at Companies House. A shareholders’ agreement is a private contract between the shareholders, allowing sensitive commercial arrangements to remain confidential.
The two documents work best together, with the articles and the agreement drafted so that they support, rather than contradict, each other.
Questions Business Owners Ask
Is a shareholders’ agreement a legal requirement?
No. There is no legal obligation to have one. However, without one, shareholders are left to rely on the company’s articles and the general law, which rarely reflect what the owners actually intended.
Can we put one in place after the company has been running for years?
Yes. A shareholders’ agreement can be put in place at any stage, although it generally requires all of the shareholders to agree. It is usually far easier to do this while relationships are still good.
We own the business 50/50. Does that make an agreement more important?
Often, yes. Equal ownership means neither shareholder can outvote the other. Without deadlock provisions, a serious disagreement can leave the business unable to make important decisions.
Do we need a new agreement if someone invests in the business?
Usually the agreement will need to be reviewed or replaced. Investors will often expect specific protections, and existing shareholders should understand how those protections affect their own position.
How often should a shareholders’ agreement be reviewed?
Whenever the business changes significantly, such as a new shareholder, investment, a change in roles or preparation for a sale. An agreement that no longer reflects the business can create problems rather than prevent them.