Who needs a shareholders’ agreement?

Anyone who is a shareholder in a company with more than one shareholder.

A shareholders’ agreement allows the shareholders to agree how a variety of issues relating to the company and their involvement are managed. That level of internal management may not automatically be given to shareholders in the company’s governing rules (the articles of association).

A shareholders’ agreement helps remove uncertainty so that shareholders know what will happen on certain trigger events during the lifetime of the company (and their involvement with it). The default position which arises from the articles of association or the general law may not suit the circumstances of the shareholders.

What uncertainty could there be?

At the initial stages in the development of a business, there are common goals. As the business develops or external circumstances force a review of plans, views can change. One party may want to invest and grow the business while another may want to organise an exit. Alternatively, one party may want to wind down a loss-making enterprise while another may view a temporary downturn as something to be ridden out with the help of additional funding.

If a shareholder wants to leave the business, what is the plan? Is there a mechanism for the remaining shareholders to effect a buy-out of that shareholding? Can those remaining shareholders afford to buy-out the shares? What is the price to be? What if a leaver wants to keep their shares? Can they be forced to sell?

What if the shareholder is a critical part of the business operation? Is there a mechanism to recover their shares automatically? Otherwise their experience and input is lost but they continue to be entitled to dividends. What happens if the exiting shareholder sets up a competitor business? Should such actions allow the remaining shareholders to buy out the shares for a lesser price?

What happens if a shareholder dies? Are the other shareholders willing to let the beneficiary take part in the running of the business or receive future dividends? Is there a way to take ownership of those shares? Will that require a payment to the beneficiary? How is that payment calculated? Can the other shareholders afford to buy-out the beneficiary? What happens if they can’t?

What if a leaver wants to sell their shares for the highest possible price to a third party? Can the other shareholders demand that shares have to be offered first to the remaining shareholders?
Can the remaining shareholders veto a sale to an unconnected third party?

Where shares can be bought by remaining shareholders, is there an agreement in place as to how the shareholding is valued? If this requires an external valuation, who will pay for that- the leaver, the other shareholders, or a combination of both? If the shares cannot be purchased with a single payment is there a mechanism for an instalment plan? Is there a potential to have external funding triggered on such an event?


All the above issues need some kind of agreement to resolve uncertainty and deliver workable solutions. Without an agreement, shareholders may be unpleasantly surprised at the position that otherwise arises on a shareholder exit.