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Going into business with another person often starts with shared goals and trust. The difficult questions can feel less urgent when everyone is getting along.
But businesses change. People take on different roles, funding needs increase, and a shareholder may want to leave, sell, reduce their involvement or stop working in the business. Others may disagree about strategy, remuneration, dividends or risk.
A well-drafted shareholders’ agreement can help deal with those issues before they become disputes. It sits alongside the Companies Act 1993 and, where relevant, the company’s constitution, recording the commercial rules the owners have agreed to follow.
It will not prevent every disagreement, but it can provide a practical roadmap when the relationship is under pressure.
Directors are generally responsible for managing the company, but shareholders may want significant matters to require shareholder approval. These are often referred to as reserved matters and may include:
The agreement should also specify the approval threshold. Requiring unanimity can protect each shareholder, but it can also create deadlock. The right threshold depends on the ownership structure and the level of control the parties intend to share.
In many privately owned companies, the same person may be a shareholder, director and employee. Those roles are connected, but they are not the same. Leaving employment does not automatically end share ownership, and losing a board position does not necessarily end it either.
The shareholders’ agreement should therefore work alongside employment agreements and the company’s constitution. It may need to address:
Conflicting documents can create uncertainty at exactly the time the parties need clarity, so these arrangements should be reviewed together.
Shareholders should agree how the company will obtain additional capital and what happens if one owner is willing to contribute more money while another is not. The agreement can address shareholder loans, new shares, dilution and approval for significant borrowing.
It can also record expectations around dividend policy, reinvestment, budgets and financial reporting. The aim is not to remove the directors’ legal responsibilities, but to reduce misunderstandings about the owners’ commercial expectations.
A shareholders’ agreement should make the exit process clear. Common provisions may include:
The agreement should also consider events such as death, serious illness, incapacity, bankruptcy or relationship property issues, which can affect ownership even when no one planned to sell.
Saying shares will be sold at “fair value” may sound simple, but it can leave important questions unanswered. A better agreement sets out the valuation process before an exit is required.
That process may cover:
Agreeing the process while shareholders are aligned can reduce the scope for an exit to become a prolonged argument about price.
A 50/50 company can become difficult to operate if the shareholders cannot agree on a major issue. Deadlock can also arise where important decisions require a high approval threshold.
The agreement should set out a staged process for resolving serious disputes, such as a formal shareholder meeting followed by mediation. If the disagreement cannot be resolved, it may provide a mechanism for one shareholder to buy the other out, require a sale process or create another agreed exit route.
There is no single deadlock clause that suits every company. The mechanism should reflect the shareholders’ relative financial positions, access to information and the practical realities of the business.
A shareholders’ agreement should not be signed and forgotten. It is worth reviewing when:
It is usually easier to update the agreement while shareholders are aligned than after a disagreement has started.
The value of a shareholders’ agreement is not limited to disputes. Preparing one encourages owners to discuss questions that might otherwise remain unspoken: Who controls key decisions? What happens if more money is needed? Can someone leave? How is their interest valued? What happens if a working shareholder stops working?
Addressing these issues early can support clearer governance, smoother succession and a more orderly exit if circumstances change.
McVeagh Fleming’s corporate and commercial team can assist with preparing, reviewing and updating shareholders’ agreements, company constitutions and related business documents.
We can also advise where shareholder, director and employment arrangements overlap, or where a dispute has already arisen and the parties need to understand their rights and options.
If your business has more than one owner, it is worth checking whether your current documents still reflect how the business operates and what the shareholders expect to happen in the future.
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
Going into business with another person often starts with shared goals and trust. The difficult questions can feel less urgent when everyone is getting along.
But businesses change. People take on different roles, funding needs increase, and a shareholder may want to leave, sell, reduce their involvement or stop working in the business. Others may disagree about strategy, remuneration, dividends or risk.
A well-drafted shareholders’ agreement can help deal with those issues before they become disputes. It sits alongside the Companies Act 1993 and, where relevant, the company’s constitution, recording the commercial rules the owners have agreed to follow.
It will not prevent every disagreement, but it can provide a practical roadmap when the relationship is under pressure.
Directors are generally responsible for managing the company, but shareholders may want significant matters to require shareholder approval. These are often referred to as reserved matters and may include:
The agreement should also specify the approval threshold. Requiring unanimity can protect each shareholder, but it can also create deadlock. The right threshold depends on the ownership structure and the level of control the parties intend to share.
In many privately owned companies, the same person may be a shareholder, director and employee. Those roles are connected, but they are not the same. Leaving employment does not automatically end share ownership, and losing a board position does not necessarily end it either.
The shareholders’ agreement should therefore work alongside employment agreements and the company’s constitution. It may need to address:
Conflicting documents can create uncertainty at exactly the time the parties need clarity, so these arrangements should be reviewed together.
Shareholders should agree how the company will obtain additional capital and what happens if one owner is willing to contribute more money while another is not. The agreement can address shareholder loans, new shares, dilution and approval for significant borrowing.
It can also record expectations around dividend policy, reinvestment, budgets and financial reporting. The aim is not to remove the directors’ legal responsibilities, but to reduce misunderstandings about the owners’ commercial expectations.
A shareholders’ agreement should make the exit process clear. Common provisions may include:
The agreement should also consider events such as death, serious illness, incapacity, bankruptcy or relationship property issues, which can affect ownership even when no one planned to sell.
Saying shares will be sold at “fair value” may sound simple, but it can leave important questions unanswered. A better agreement sets out the valuation process before an exit is required.
That process may cover:
Agreeing the process while shareholders are aligned can reduce the scope for an exit to become a prolonged argument about price.
A 50/50 company can become difficult to operate if the shareholders cannot agree on a major issue. Deadlock can also arise where important decisions require a high approval threshold.
The agreement should set out a staged process for resolving serious disputes, such as a formal shareholder meeting followed by mediation. If the disagreement cannot be resolved, it may provide a mechanism for one shareholder to buy the other out, require a sale process or create another agreed exit route.
There is no single deadlock clause that suits every company. The mechanism should reflect the shareholders’ relative financial positions, access to information and the practical realities of the business.
A shareholders’ agreement should not be signed and forgotten. It is worth reviewing when:
It is usually easier to update the agreement while shareholders are aligned than after a disagreement has started.
The value of a shareholders’ agreement is not limited to disputes. Preparing one encourages owners to discuss questions that might otherwise remain unspoken: Who controls key decisions? What happens if more money is needed? Can someone leave? How is their interest valued? What happens if a working shareholder stops working?
Addressing these issues early can support clearer governance, smoother succession and a more orderly exit if circumstances change.
McVeagh Fleming’s corporate and commercial team can assist with preparing, reviewing and updating shareholders’ agreements, company constitutions and related business documents.
We can also advise where shareholder, director and employment arrangements overlap, or where a dispute has already arisen and the parties need to understand their rights and options.
If your business has more than one owner, it is worth checking whether your current documents still reflect how the business operates and what the shareholders expect to happen in the future.
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
