Is a Shareholders’ Agreement Really Necessary?

If you’re setting up or already running a limited company with more than one shareholder, chances are you’ve heard people mention a shareholders’ agreement.

But what exactly is it — and do you really need one?

In short: yes, if you want to protect your business, preserve relationships, and avoid costly disputes down the line.

Let’s explore why this document is so important, what it should include, and how it can help your business run more smoothly.

What Is a Shareholders’ Agreement?

A shareholders’ agreement is a legally binding contract between the owners (shareholders) of a company. It sets out:

              •            How the business will be run

              •            How decisions will be made

              •            What happens if someone wants to leave

              •            What to do if things go wrong

While your company’s Articles of Association set out the legal framework for the company, the shareholders’ agreement deals with the practicalities of ownership and control — especially when situations get tricky.

Why Is It So Important?

Without a shareholders’ agreement, you’re relying entirely on the default company law rules — and those rarely reflect the realities or risks of running a small or growing business.

Some key reasons to have one include:

1. You will have clarity from the start.  Everyone knows where they stand. It defines each shareholder’s rights, responsibilities, and expectations — reducing the risk of misunderstandings.

2. It will protect minority shareholders. It can give smaller shareholders certain rights, such as veto powers on major decisions, which wouldn’t otherwise exist under company law.

3. You will know how to manage disputes.  If a disagreement arises, the agreement can include a process for resolving it — whether that’s through mediation, arbitration, or a buy-out.

4. People’s exit from the company can be pre-planned.  If someone wants to sell their shares, or retire, or dies, the agreement can set out what happens — so you’re not left dealing with the fallout without a plan.

5. It can even prevent unwanted new shareholders by restricting who shares can be sold or transferred to, so you don’t end up in business with someone you don’t know or trust.

What Should Be Included in a Shareholders’ Agreement?

Every business is different, but some common clauses include:

• Share transfers: Can shareholders sell their shares? Do others get the first option to buy?

  
  

• Decision-making: What decisions need unanimous approval? Who can act unilaterally

  
  

• Dividends: How and when are profits paid out?

  
  

• Roles and responsibilities: Will shareholders also be directors? What are their duties?

  
  

• Exit strategy: What happens if someone dies, becomes ill, or wants to leave?

  
  

• Non-compete clauses: Prevents ex-shareholders from setting up in competition.

  
  

• Dispute resolution: How will disagreements be handled if they can’t be resolved informally?

Do you need an expert?

You can use a template, but this carries serious risk. Poorly drafted agreements often cause more harm than good — and off-the-shelf documents may not reflect your company’s structure, goals, or values.

An expert can help tailor the agreement to your exact needs — especially if you’re:

              •            Bringing in outside investors;

              •            Changing the share structure;

              •            Planning for long-term growth or exit; or

              •            Wanting to protect minority shareholders.

What Happens Without One?

Without a shareholders’ agreement, problems can arise when:

• A shareholder wants to leave and sell their shares to someone unexpected

•  There’s a disagreement on strategic direction or profit sharing

•  One shareholder dies, and their shares go to someone uninvolved in the business

•  A director/shareholder is no longer contributing but can’t be forced out

These situations often lead to stalemates — or worse, expensive and time-consuming litigation.

How We Can Help

At Your Legal Team, we specialise in helping SMEs put in place sensible, practical shareholder arrangements. Whether you’re a start-up with two founders or a growing business with a group of investors, we’ll help you build a tailored agreement that fits your business — and prevents future stress.