Making your shareholders’ agreement watertight: practical tips from corporate and disputes specialists

A well-drafted shareholders’ agreement is one of the best investments you can make in your business. It sets out the rules of your relationship with fellow shareholders and clarifies expectations.

Unlike your articles, a shareholders’ agreement can be kept confidential. It provides a plan if things change or go wrong, reduces the chance of stalemates, provides clear exit routes for shareholders and lowers the risk of costly, time-consuming disputes.

From our combined corporate and litigation experience, the most common problems arise not from complex legal points but from gaps, vague wording or documents that no longer reflect how the business actually runs.

Below, we set out the essentials of a robust shareholders’ agreement, including any red flags and how to future‑proof it for both day‑to‑day use and if a dispute arises.

Decision-making and reserved matters

• All shareholders’ agreements should be clear about what the board of directors can decide and what requires shareholder approval. You can use a simple list of ‘reserved matters’ that require a higher threshold (for example, 75%). Better yet, tailor the list to your business and its priorities, whether this is fundraising, borrowing, hiring senior roles, securing big contracts, issuing shares or changing business scope.

Ambiguity breeds disputes, so it’s important to use clearly defined terms and numbers rather than phrases like ‘material’ or ‘significant’, unless you tie these to specific thresholds.

Board composition and information rights

• Your shareholders’ agreement should set out how many directors you have, who appoints them and how they can be removed. It should also decide whether key shareholders have the right to appoint an observer and give all shareholders basic information rights (management accounts, budgets, KPIs) at sensible intervals.

Clear information reduces suspicion and helps avoid the “we didn’t know” dynamic that often sparks disputes and claims.

Deadlock prevention and cure

• Try to prevent deadlock through clear voting rules and, where appropriate, a chair’s casting vote. If deadlock happens, prescribe a staged process: internal escalation, mediation, independent expert determination for specific issues, then buy‑out mechanisms if needed.

Building a clear, quick and confidential dispute resolution mechanism into your shareholders’ agreement is crucial. These mechanisms can avoid the management time and costs associated with litigation and, at the very least, help the parties to agree certain facts or narrow disputed issues between them.

Share transfers and exits

The shareholders’ agreement should make it clear that existing shareholders have first refusal on the issue of new shares to prevent dilution of their original shareholding. It should also set out when shares can be sold, to whom and on what terms (including transfers to family or group companies). Regarding exits, the shareholders’ agreement should include leaver provisions, defining ‘good’ and ‘bad’ leavers, what happens to their shares and at what price. Finally, your shareholders’ agreement should include tag and drag clauses, which protect minority shareholders with tag-along rights and enable full exits with drag-along provisions (with a fair price test).

Exit-related issues are a major source of disputes, so clarity on pricing and process is essential.

Valuation mechanics that work in real life

• Choose a valuation method that fits your sector (for example, EBITDA multiple or an independent valuer). Confirm who appoints the valuer, what they should consider and that their decision is final save for manifest error. To avoid future costs, ensure your shareholders’ agreement sets out timelines and which party will pay.

Often, these clauses are left vague and silent about the specific steps parties need to take, resulting in delay and significant cost. Expert valuations, which are often needed when one party must be bought out, can be costly. While parties can obtain their own expert reports, the respective experts often end up arguing points of disagreement, which can be avoided if there’s a sufficient valuation mechanism set out in the shareholders’ agreement.

Funding, dividends and salaries

The shareholders’ agreement should state if shareholders are expected to provide loan funding and on what terms; the dividend policy (for example, board discretion subject to cash cover and covenants); and remuneration for working shareholders, preventing rows over ‘dividends v salaries’.

Clear expectations help defuse tension between active and passive shareholders.

Protecting the business

The shareholders’ agreement should prescribe tight and practical confidentiality obligations, reasonable and appropriately narrowed restrictive covenants and provisions dealing with intellectual property and its ownership.

Narrow, targeted restrictions are more likely to be upheld than broad, catch‑all bans.

Minority protections and majority comfort

In your shareholders’ agreement, you should set out protections for your minority shareholders (reserved matters, tag rights, information rights and unfair prejudice awareness) and comfort for majority shareholders (drag rights, leaver rules and the ability to act where a shareholder is obstructive or in breach).

Balance is key – one‑sided agreements are the ones most likely to end up in court.

Dispute resolution, law and jurisdiction

The shareholders’ agreement should set out an escalation clause, covering internal discussions, mediation and then litigation or arbitration. It should also be explicit about the parties’ choice of court and governing law (usually England and Wales for UK companies).

How we work with clients

If litigation was war, our Corporate team helps ensure your shareholders’ agreements are commercial, clear and enforceable, so you’re properly prepared and well-stocked for any battles in the future.

If you don’t have a shareholders’ agreement, get one in place before your next funding round or key hire. If you have one, review it against the points above and your current articles. Sense‑check your leaver, valuation and transfer provisions as these are common flashpoints.