A shareholders’ agreement is a contract between the owners of a company that governs how they will run it together and what happens when circumstances change. Its whole purpose is to answer difficult questions calmly, in advance — while everyone is still on good terms — so that a future disagreement is resolved by a document rather than a dispute. Here is what a considered agreement addresses.
Who decides what
A good agreement sets out how decisions are made: which matters the directors can decide alone, and which require the agreement of shareholders or a special majority. Reserved matters — issuing new shares, taking on significant debt, changing the business, or paying dividends — are typically carved out so that a minority owner cannot be steamrolled on the things that most affect them.
How money comes in and goes out
The agreement should address how the company will be funded if it needs more capital, what happens to a shareholder who cannot or will not contribute, and the policy for distributing profits. Clarity here prevents the common conflict between owners who want to reinvest and owners who want to be paid.
What happens when someone wants to leave — or has to
Share transfer provisions are the heart of most agreements. Pre-emptive rights give existing owners the first chance to buy a departing shareholder’s stake; “drag along” and “tag along” clauses protect both majority and minority owners in a sale. Good leaver and bad leaver provisions determine what a departing owner is paid depending on the circumstances of their exit.
The events nobody wants to think about
Death, incapacity, bankruptcy, divorce and serious disagreement can each destabilise a company. A well-drafted agreement provides a mechanism to value and buy out an affected shareholder’s interest, so the business can continue and the affected owner (or their estate) is treated fairly.
How disputes get resolved
Finally, the agreement should specify how a deadlock or dispute is broken — through negotiation, mediation, a buy-sell mechanism, or as a last resort a structured exit — rather than leaving the owners to litigate from scratch.
This article is general information only and not legal advice. Every business is different; a shareholders’ agreement should be tailored to your company, your co-owners and your goals.