When you’re starting or building a business with other people, establishing clear rules and expectations between shareholders is vital. A well-drafted shareholder agreement will protect all parties involved, help things run smoothly, and, if things do go wrong, can avoid costly disputes. Too often, companies fall into traps by relying on generic advice and overlooking critical elements. In this blog, we’ll explore common mistakes in shareholder agreements, explain why they matter, and show you how to avoid them. It, of course, can only serve as a general introduction to potential issues that may arise when drafting shareholder agreements. If you require more formal advice, consider consulting a Jamieson Law specialist in Shareholder Agreements.
Why Shareholder Agreements Matter In Business
Shareholder agreements are legally binding documents that outline the rights and obligations of everyone involved. They go beyond a company’s Articles of Association, which provide a basic framework in line with UK business rules, and provide detail and clarity on operational roles, decision-making powers, ownership rights, exit procedures, and more.
Robust and well-drafted shareholder agreements are essential for both startups and well-established companies. For startups, they provide structure from the outset. For established companies, they can offer protection during changes in ownership, direction, or shareholder relationships.
Unlike Articles of Association, which are public documents, shareholder agreements are private and offer flexibility to reflect the unique dynamics of your business. Shareholder agreements matter because they serve as a key proactive tool to prevent business disputes arising between shareholders.
Even with the best intentions, however, it’s easy for business owners to make missteps when creating or updating a shareholder agreement. Even if they don’t lead to disputes, errors can lead to confusion and delay progress.
To help, we’ve outlined the key mistakes to look out for when drafting shareholder agreements. To be wholly confident you have covered everything correctly, however, we recommend asking a shareholder agreement solicitor to review your draft agreement before moving forward.
Mistake 1 – Using a One-Size-Fits-All Shareholder Agreement Template
One of the most common mistakes when drafting a shareholder agreement is relying too heavily on generic documents or online templates.
Repurposing a template document might be a tempting time and cost-saving option, but it rarely leads to an agreement that is genuinely fit for purpose. Every business is the result of a unique set of circumstances and relationships. Assuming one-size-fits-all or that you can borrow from others rarely accounts for the one-of-a-kind nuances that make your business what it is.
For example, a template may not cover specific funding arrangements, unique voting rights, or tailored provisions around key decision-making. Worse still, a poorly customised agreement could contradict your Articles of Association or create ambiguity over shareholder rights.
A custom agreement, approved by a qualified shareholder agreement solicitor, ensures your document is legally sound and reflective of your business model.
Mistake 2 – Failing to Outline Roles and Responsibilities
Another frequent oversight in drafting shareholder agreements is failing to define the specific responsibilities of each shareholder beyond generic management duties. This is especially problematic when some shareholders are actively involved in running the business while others are passive investors.
Without clear role definitions, misunderstandings can quickly become problematic. How active should active shareholders be? What role do they play in day-to-day operations? How often should they update passive shareholders? It pays to be transparent and explicit about expectations for all round. A shareholder agreement ought to clearly outline the roles, responsibilities, and expectations of each party. Clauses should cover operational involvement, voting powers, reporting duties, and other relevant matters.
Mistake 3 – No Exit Strategy or Share Transfer Terms
Many business owners delay thinking about what happens if someone wants, or needs, to leave the company and sell or transfer shares, businesses can face severe disruptions. For instance, if a shareholder wants to sell their shares to an external party, what happens next? Can the remaining shareholders prevent a third party from acquiring a stake in the company? Are there rights of first refusal or buyback provisions in place? How much should the buyback cost? What if a shareholder dies in their post? Do the shares become part of the estate?
Your shareholder agreement should transparently outline the processes you have in place for the sale or transfer of shares, including any caveats or restrictions. Succession planning and exit strategies depend on how you draft the share transfer clauses in your shareholder agreement. Done well, they offer your company stability and continuity as it moves forward.
Mistake 4 – No Dispute Resolution Mechanism
Disagreements are likely to arise from time to time, even in the healthiest of businesses. Minor shareholder frustrations can quickly escalate, draining company resources. Your shareholder agreement should therefore include mechanisms for resolving disputes without resorting to litigation. Considerations include routes to mediation or arbitration, procedures for deadlocks (e.g., casting votes or third-party intervention) and exit options for instances when differences become irreconcilable.
Mistake 5 – Sidelining Minority Shareholders
Failing to protect the interests of minority shareholders in any agreement is another mistake that can lead to disruption, claims of unfair prejudice, legal action, and damaged business reputation.
Minority shareholders, those who own less than 50% of the shares, often have limited control over decisions, as the majority shareholders can override their rights. This can lead to frustrations, disputes or even forced exits.
Problems can be avoided by mitigating concerns in your shareholder agreement. Including reserved matters that require unanimous or supermajority approval is helpful. Establishing pre-emption rights on share issues and transfers can also protect minority shareholders, as can drafting ‘tag-along’ clauses to protect minority interests in the event of sale.
Mistake 6 – Inconsistency with Articles of Association
Your shareholder agreement and Articles of Association should work together, not against each other. Unfortunately, it’s common to find contradictions between the two, especially when updates are made to one without reflecting them in the other.
Conflicting provisions can create uncertainty and legal challenges, particularly if disputes end up in court. Courts may favour one document over the other, often defaulting to the Articles of Association, which are publicly registered with Companies House.
To avoid issues:
- Review both documents together during drafting and updates
- Ensure key terms (e.g., share rights, voting thresholds) are consistent.
- Seek legal advice to harmonise the two documents.
At Jamieson Law, we help ensure your shareholder agreements align seamlessly with your Articles of Association. Read more about Jamieson’s Law Articles of Association guidance services.
How to Get It Right from the Start
Shareholder agreement mistakes can cost your business dearly. We’ve covered the basics of shareholder agreements here, but investing in professional legal advice is the most innovative way to protect your interests.
Our Corporate Law team specialises in helping businesses draft tailored shareholder agreements and other legal documents that align with your goals, ownership structure, and legal obligations. We take the time to understand your business and craft agreements that cover every eventuality, from role clarity to exit strategies, dispute resolution, and legal consistency.
Don’t wait for a problem to arise before establishing the right legal foundations. Get in touch with us today to learn how our corporate legal services can help you write a shareholder agreement that will lead to ongoing success.
