Should all businesses with shareholders have a shareholders’ agreement?

In most cases, yes. For many business owners, the early focus is naturally on growth, opportunity and getting the company off the ground. What is often overlooked is what happens if shareholders later disagree, one of them wants to leave, or circumstances change unexpectedly. A well-drafted shareholders’ agreement can provide a practical framework for dealing with these issues before they become costly problems.

Although a shareholders’ agreement is not a legal requirement, it is usually a sensible step for any company with more than one shareholder. Even where the shareholders are family members, close friends or long-standing business partners, it is important to have a clear framework in place from the outset. A shareholders’ agreement can help reduce uncertainty, clarify expectations and provide a structured way of dealing with disputes or changes in ownership.

What will a shareholders’ agreement cover?

A shareholders’ agreement can cover a wide range of matters relating to the shareholders’ relationship with each other and with the company. Common provisions include decision-making and voting rights, the responsibilities and obligations of shareholders, how profits may be distributed, and how shares can be transferred or sold. It can also deal with situations such as a shareholder wanting to exit the business, becoming incapacitated, divorcing, retiring or dying. Many agreements also include mechanisms for valuing shares, restrictions on selling to third parties, confidentiality obligations and procedures for resolving disagreements.

Who does a shareholders’ agreement protect?

A shareholders’ agreement can protect all shareholders, but it is often particularly valuable for minority shareholders. Without additional contractual protections, a minority shareholder may have limited influence over major business decisions. A carefully drafted agreement can require certain decisions to have wider approval, helping to prevent unfair treatment or exclusion. It can also protect majority shareholders and the company itself by setting expectations clearly, reducing the risk of disputes and helping maintain business continuity if circumstances change.

Why do you need a lawyer to help you prepare one rather than buying an off-the-shelf template?

Off-the-shelf templates may appear to save time or money, but they are rarely designed around the particular needs of your business, its ownership structure or the issues that

are most likely to arise in practice. A solicitor can ensure that the agreement works alongside the company’s articles of association, reflects the commercial intentions of the shareholders and addresses business-specific risks. Tailored legal advice can also help identify problems that may not be obvious at first, such as deadlock provisions, minority protections, share valuation clauses and exit arrangements. Getting the drafting right at the start can help avoid uncertainty, disputes and expensive legal action later.

What could happen if you don’t have a shareholders’ agreement?

Without a shareholders’ agreement, the business may be left relying solely on the company’s articles of association and general company law, which may not provide enough detail or protection for the shareholders’ particular circumstances. This can lead to uncertainty over decision-making, disputes about ownership and control, difficulties when a shareholder wants to leave, and problems if shares pass to an unexpected person. In some cases, disagreements can escalate into deadlock, damage trading relationships or even threaten the future of the company. Putting a clear agreement in place early can reduce these risks and give everyone greater confidence about how the business will operate if things do not go to plan.

For many companies, a shareholders’ agreement is not simply a useful extra but an important part of protecting the business and the people invested in it. Taking advice at an early stage can help ensure the agreement reflects the realities of the business and supports its long-term stability.

If you would like individual advice relating to a shareholders’ agreement for your business, please contact Jenny Ball on jennyball@fraserdawbarns.com.

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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.