When a new company is formed—often by business partners, colleagues, or even family members—there is typically great optimism and a shared vision. Yet, despite the best intentions, disagreements can and do arise. A shareholders’ agreement is one of the most effective tools for preventing such disputes and protecting the long-term stability of the business.

During the Company Law Updates webinar, Alison Walker outlined the reasons why a comprehensive shareholders’ agreement is not simply beneficial, but essential. Below is a detailed look at the advantages highlighted in her presentation.

1. Clear Definition of Rights, Duties, and Expectations

A shareholders’ agreement allows all parties to set out, in unambiguous terms, each shareholder’s duties, obligations, and expectations. While this level of clarity is rarely established during company formation, doing so early can prevent uncertainty and conflict later.

By specifying the roles and responsibilities of shareholders and directors, the agreement acts as a reference point whenever ambiguity arises.

2. A Powerful Dispute-Prevention Tool

Alison referred to shareholders’ agreements as “business prenups”, and with good reason. When rights, procedures, and expectations are clearly expressed, many common sources of conflict never materialise.

These agreements help prevent disputes by:

• Establishing decision-making rules
• Managing the flow of authority between shareholders and directors
• Setting protocols for resolving key issues before tensions escalate

The clarity they provide is often what protects the company from time-consuming and costly disagreements.

3. Confidential Protection of Shareholder Rights

Unlike company constitutions, shareholders’ agreements are private documents. This confidentiality ensures sensitive information—such as ownership structures, voting arrangements, and exit terms—remains out of the public domain.

They also shield shareholders’ rights from being altered without consent, creating a stable framework that cannot be easily overridden.

4. Tailored Governance and Control

One of the strongest advantages is customisation. While constitutions are often generic, a shareholders’ agreement can be uniquely crafted to suit the company’s structure, the relationships between shareholders, and the specific needs of the business.

Key governance questions can be addressed, such as:

• How much control do shareholders exert over management decisions?
• Who will serve as directors?
• Do all shares carry equal voting rights?
• How are major decisions approved?

This level of tailoring ensures the document works for your company—not a generic template.

5. Clear Entry and Exit Strategies

A well-drafted shareholders’ agreement sets out exactly how a person becomes a shareholder and on what terms. Just as importantly, it defines how a shareholder can exit the company.

Exit provisions may address:

• Whether a shareholder can be compelled to sell their shares
• Whether one shareholder can require another to purchase their shares
• How shares will be valued
• Whether payments will be lump-sum or staged
• Whether restraints of trade will apply (and for how long, in what area, and in what industry)

By considering these issues at the outset, companies can avoid deadlock situations that otherwise could cripple operations.

6. Flexibility to Evolve With the Business

Shareholders’ agreements can be designed to be flexible or highly rigid depending on the company’s needs. As the business grows, its provisions can be amended—provided the shareholders agree.

This adaptability ensures the agreement remains a living document that continues to serve the business over time.

7. Avoiding Stalemate and Costly Deadlock

Without clear protocols, a disagreement between shareholders can quickly escalate into a stalemate, paralysing the company. Alison emphasised that many businesses ultimately fail due to unresolved shareholder disputes.

A shareholders’ agreement provides mechanisms to break deadlock, preserving the functioning—and often the survival—of the company.

8. Avoiding the Risks of Generic Templates

While template agreements are readily available online, they rarely reflect the realities of a specific company’s circumstances or jurisdiction. Alison warned that relying on templates can leave companies tied to terms they neither understood nor intended to adopt.

Reviewing and customising the agreement with professional advice ensures it truly reflects the values, goals, and needs of the shareholders.

9. Encouraging Early and Effective Dispute Resolution

Another valuable component is the ability to include a dispute-resolution clause, often specifying mediation or arbitration. Mediation in particular is:

• Cost-effective
• Confidential
• Especially suitable for disputes involving family businesses
• Favoured by courts when appropriate

If a dispute does arise, courts may even penalise a party who unreasonably refuses to participate in mediation. Having a mediation clause encourages early action before positions become entrenched, significantly improving the likelihood of reaching a resolution.

A shareholders’ agreement is not merely a legal formality—it is an essential governance tool that protects shareholders, preserves relationships, and safeguards the company’s future. As Alison highlighted, it ensures important issues are discussed and resolved before they become problems, providing stability in moments when it is needed most.

Every company with two or more shareholders should consider establishing a tailored, professionally drafted shareholders’ agreement. It is an investment that can prevent conflict, maintain harmony, and underpin the long-term success of the business.

FAQs:

1. What is a shareholders’ agreement?

A shareholders’ agreement is a private, legally binding contract between a company’s shareholders that outlines their rights, obligations, decision-making processes, and how various business matters will be handled.

2. Why is a shareholders’ agreement important?

It provides clarity, prevents misunderstandings, and protects the company from internal disputes. Without one, disagreements can escalate and even jeopardise the company’s survival.

3. How does it help prevent disputes?

By clearly setting out expectations, roles, and procedures, many common disagreements are resolved before they arise. Alison Walker referred to such agreements as “business prenups” because of their strong dispute-prevention value.

4. Is a shareholders’ agreement confidential?

Yes. Unlike company constitutions, which are public, shareholders’ agreements remain private. This protects sensitive information about ownership, voting rights, and exit arrangements.

5. Can a shareholders’ agreement be customised?

Absolutely. One of the main benefits is that it can be specifically tailored to the needs of the company and its shareholders, unlike generic templates or standard constitutions.

6. What governance issues can it address?

A shareholders’ agreement can clarify important matters such as:

• How much control shareholders have
• Who will serve as directors
• How decisions are made
• Whether shares hold equal voting rights

This ensures everyone understands the company’s structure from the start.

7. How does a shareholders’ agreement manage shareholder exits?

It can outline:

• Whether a shareholder can be forced to sell or can request a buyout
• How shares will be valued
• Payment arrangements (lump sum or instalments)
• Whether restraints of trade apply

This prevents uncertainty and conflict when someone wants to leave the business.

8. What happens if shareholders don’t have an agreement?

Lack of clarity can lead to stalemates or disputes, which may be costly, time-consuming, and damaging to the company’s future. In some cases, these disputes can even cause a business to fail.

9. Are online template agreements safe to use?

Not usually. Templates rarely reflect a company’s specific needs or legal jurisdiction. Alison warned that many businesses end up bound by terms they never intended simply because they used generic templates without proper review.

10. Can a dispute-resolution clause be included?

Yes. Many agreements include mediation or arbitration clauses. Mediation is particularly encouraged because it is cost-effective, private, and often successful—especially where family members are involved in the business.

11. Can courts penalise a party who refuses mediation?

Yes. If a party declines mediation without good reason—especially when it’s suggested by another party or the court—the judge may award costs against them.

12. Can the agreement be changed later?

Yes. A shareholders’ agreement can be amended if shareholders collectively agree. This flexibility allows it to evolve with the company as circumstances change.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.