The ultimate company prenup: what’s a shareholder agreement and why do I need one?


Running a business isn’t always plain sailing and some of those most tricky situations can arise when there’s a breakdown in shareholder relationships.

This can happen for many reasons, such as a change in the direction of the company, lack of performance, difference in opinion or mistreatment of duties.

So, what can be done to help avoid a costly fallout? A shareholder agreement is a good place to start.

This is a vital businesses document that sets out the rights and responsibilities of shareholders.

Having these in place can have significant influence in safeguarding the interests of both shareholders and the company itself.

It’s rather like a prenuptial agreement for your company; a private agreement between shareholders that regulates their relationship after they go into business together and will cover what would happen if, for any reason, the relationship doesn’t go to plan.

What to cover

It’s important to say that having a shareholder agreement is not a legal requirement but, it makes sense to acknowledge that relationships can change and ideas and aspirations can get out of sync. Plus the economic climate can have an impact, or life simply throws a curve ball.

When it comes to a shareholder’s agreement, all have certain standard elements. The key to making yours successful is to put effort into developing a clear and comprehensive arrangement.

Key areas to consider:

  • Rights and responsibilities – this includes details such as voting rights, dividend distribution, and obligations related to financial contributions or management responsibilities
  • Transfer of shares – a restriction on a shareholder transferring their shares to another party
  • Sales of shares – an agreed valuation basis, should a shareholder wish to exit the business
  • Restrictive covenants – limiting a shareholders business activity while being an existing member and post exiting. This might include clauses that help safeguard the company’s intellectual property, trade secrets, and competitive advantage.
  • Events of default – looking at what happens to shares in the event of death, divorce, bankruptcy and so on
  • Succession planning - outlining procedures for transferring shares, resolving disputes related to a transition in ownership, or specifying how a buyout must happen in the event a shareholder leaves or dies.

How to cover minority shareholders

Shareholder agreements can and do include provisions specifically to safeguard the rights of minority shareholders.

Generally, decisions within a company are decided by majority vote. Therefore, if a company has a single or a small group of majority shareholders, they are able to control all decisions made.

But this may not be desirable in all scenarios. It’s a good idea to consider this and whether your agreement should include provisions that ensure minority shareholders have a say.

Cutting conflict

This is key and will usually be the main reason for drawing up the document in the first place – and it’s why it pays to bring in the professionals.

Yes, standard shareholder agreement templates are readily available on the internet but keep in mind they will not have all the information that is pertinent to your business. As such, they are unlikely to be fit for purpose.

In the event of a dispute, that template may not provide the tools necessary to progress to a satisfactory resolution. 

The best shareholder agreements include mechanisms for resolving conflicts. This can be with solutions such as mediation, arbitration, or predetermined procedures for making decisions.

We would recommend involving your solicitor to assist with drawing up the legal document to ensure that it will be clear what actions should be taken and will stand up to scrutiny in the courts if required.

With such clear structure in place, there’s a much less chance of disputes boiling over and disrupting the business.

Back to business

With planning, hopefully once a shareholders agreement is entered into, it can be filed away and never called upon.

But if you do find yourself in a situation that threatens to impact your company, you’ll be reassured by the time and money spent in planning ahead.

For help and advice with a SHA or any other accountancy needs, please contact Beatons or 01473 659777.