What a shareholders agreement should address

A shareholders' agreement records agreed rights and obligations between its parties. It can help owners manage funding, decisions and exits, but it should be designed around the actual business and read alongside the articles. A generic document may miss the issue most likely to cause a dispute.

Start with the ownership and working roles

Record who owns which shares, who works in the business and who provides money or other resources. Separate employment, directorship and ownership. A shareholder who stops working does not automatically lose shares unless an effective arrangement provides for the relevant process.

Discuss the expected contribution of each founder and how the position may change after investment. The agreement should address a realistic business model rather than assume every owner will always contribute equal time and money.

Agree decision and information rights

Decide which matters remain with the board and which require additional shareholder consent. Consider borrowing, major expenditure, new shares, related-party transactions and a sale of the business. Define thresholds and the information needed for a decision.

The company's articles set important governance rules, including decision-making and share rights. Check the actual articles rather than assuming the model wording applies unchanged. ^[1]

Plan funding and distributions

Explain whether future funding is optional or compulsory, and whether it takes the form of equity or loans. Consider what happens if one shareholder cannot contribute. Do not leave dilution, repayment priority or dividend expectations to an informal assumption.

A dividend policy cannot authorise an unlawful distribution. The agreement needs to work with company law, share rights and the company's financial position.

Address transfers and departures

• Restrictions on selling or transferring shares.
• Rights of existing owners to buy first where agreed.
• Valuation and payment arrangements on departure.
• Death, incapacity and relationship breakdown.
• Deadlock and dispute resolution.
• Treatment of confidential information and intellectual property.

Make the documents work together

Check consistency between the agreement, articles, service agreements and investment documents. Consider who is bound and how a future shareholder joins the agreement. Some desired arrangements may require an articles amendment and the associated approval and filing process. ^[2]

For example, founders may agree privately that a share transfer needs consent while leaving the company's constitutional process unclear. Aligning the documents helps prevent competing answers when a transfer is proposed.

Translate the owners' expectations into decisions

Ask each owner to describe what they expect during the next two years: working time, salary, funding, access to information and a possible exit. Compare the answers before drafting. Two founders can agree equal ownership while holding incompatible assumptions about whether one may stop working, start another business or demand repayment of money advanced.

Turn those differences into specific choices. If additional funding is needed, who decides the amount and what happens if an owner cannot participate? If one founder wants to sell, who can buy and how is the price determined? A useful agreement addresses those situations through workable procedures instead of relying on a general promise to cooperate.

Model a funding shortfall and an exit

Use an illustrative cash requirement and show the proposed contribution from each owner. Compare a shareholder loan with a share issue, including the effect on repayment and control. The exercise is not a tax calculation; it tests whether the owners understand the commercial outcome and which approvals the documents require.

Then model a departure where the business cannot pay a buyout price immediately. Consider instalments, security, valuation disputes and continuing guarantees. A clause requiring a rapid purchase may be impractical if neither the company nor the remaining owners can fund it. The drafting should distinguish the desired outcome from the mechanism that can actually deliver it.

Decide how the agreement will remain usable

Name the notices and information that trigger important processes. Define the recipient, response period and method of recording consent. Consider how new shareholders join and whether rights depend on maintaining a minimum holding or an active role. A right designed for a founder with half the company may work differently after several investment rounds.

Align the agreement with the articles and employment arrangements, but avoid assuming that identical wording is always appropriate in every document. Some constitutional provisions are public, while the shareholders' agreement has its own parties and enforcement questions. An adviser should explain where each protection belongs and which consents are needed to implement it.

Prepare a focused review brief

Provide the current ownership, articles, existing agreement and the three scenarios most likely to cause disagreement. Identify provisions the owners have already agreed and points still open. This gives the review a concrete purpose and helps prevent a negotiation from becoming an unfocused discussion of every possible company risk.

Read Reserved matters in shareholder agreements for consent thresholds and Shareholders agreement review for help reviewing the agreement against the actual ownership and commercial arrangements.

Before signing, walk through a normal decision, a funding shortfall and a difficult exit using the draft terms. If the owners cannot explain how those scenarios work, the document needs clarification rather than another page of broad promises.