When it comes to selling your business, most business owners focus on the price, the buyer, and the tax implications. But one document is often overlooked. The Shareholders’ Agreement.
We’ve seen first-hand how a well-drafted Shareholders’ Agreement can smooth the path or, if it’s missing or unclear, derail the entire process.
Here’s why your Shareholders’ Agreement matters more than you think.
What is a Shareholders’ Agreement?
A Shareholders’ Agreement is a legally binding contract between the shareholders of a company. It governs how the business is run, what happens when things go wrong, and crucially, how shares can be sold or transferred.
Unlike the company’s articles of association (which are public), a Shareholders’ Agreement is private.
Why it matters during a sale
When a business is being sold, especially if it’s a share sale, the buyer needs to know:
- Who owns what
- Who has the right to sell
- What approvals are needed
- Whether any other shareholders can block or delay the deal
If there’s no clear agreement in place, it can lead to confusion, delays, disputes, or even collapse the deal entirely.
Common issues that arise
- Disputes between shareholders
Without an agreement in place, there may be no defined process for resolving disputes or forcing a sale. This is particularly tricky if some shareholders want to sell, and others don’t.
- No drag-along or tag-along rights
- Drag-along rights allow majority shareholders to force minority shareholders to sell if a buyer wants 100% of the business.
- Tag-along rights allow minority shareholders to join the deal if the majority is selling.
Without these, buyers may walk away if they can’t acquire the full company. Or minority shareholders may be left behind.
- Valuation disagreements
In the absence of a set method for valuing shares, there can be disputes over price, especially in partial sales or buyouts.
- Lack of consent procedures
If there’s no mechanism in place to approve a sale (e.g. board or shareholder majority requirements), you can get stuck in legal limbo.
What your Shareholders’ Agreement should cover
If you’re considering a sale, or even just preparing for one in future, your Shareholders’ Agreement should address some of the following.
- Share transfer rules (who can sell, and how)
- Pre-emption rights (do other shareholders get first refusal?)
- Drag-along and tag-along clauses
- Valuation method for shares
- Dispute resolution procedures
- Deadlock provisions
- Consent and approval thresholds for major decisions
Each business differs in its requirements but these clauses provide clarity and prevent last-minute surprises when a buyer comes knocking.
It’s not just for exits
Even if a sale isn’t on the horizon, a Shareholders’ Agreement provides vital protection in other scenarios like when a co-founder leaves, passes away, or wants to transfer shares to a family member or outside investor.
Think of it as a business pre-nup: you hope never to need it, but you’ll be glad it’s there if things get complicated.
Getting one in place
A sale is often the biggest event in a business owner’s journey. Having a clear and well-drafted Shareholders’ Agreement can mean the difference between a smooth, profitable exit and a stressful, drawn-out process full of legal roadblocks.
If your business has multiple shareholders and you’re planning to sell (or just want to be ready), now’s the time to get your agreement reviewed or drafted properly.
