- Fiona Ettles
- Jul 14
- 4 min read
Why you don’t need a shareholder's agreement… until you really do
By Fiona Ettles, Partner at FinConnect
A shareholder's agreement is one of those documents that feels optional when everything is running smoothly. Everyone’s getting along, the business is growing, and there’s no reason to think that might change. But the moment someone wants to retire, reduce their hours, exit unexpectedly, or tragically passes away, that missing agreement becomes a real problem.
In the absence of a clear agreement, even a small misalignment between shareholders can escalate. We have seen this firsthand time and time again. Disputes over valuation, payout timeframes, and voting rights have landed otherwise amicable business partners in court, draining time, energy, and capital from all involved.
What a shareholder's agreement is designed to do
It sets the ground rules for how the shareholders of a business make decisions, enter and exit, resolve disputes and handle the unexpected. It also ensures everyone is clear on their rights, responsibilities and obligations while they remain in the business and if they ever need to leave it.
An agreement can cover:
How shareholders can join or leave the business
Whether all shareholders must work in the business or meet minimum contribution levels
What happens in the event of retirement, illness, death or bankruptcy
Valuation methodology for the business, including worked example/s
Expectations around dividend policy, profit distribution and board meetings
Rules for major decisions like borrowing or changing the constitution
Dispute resolution processes such as mediation
Insurance and buy-sell funding arrangements
Drag along and tag along rights
Restraints to protect the business from future competition
What constitutes a default event
Clauses that matter more than you think
Entry and exit The agreement should set out who can become a shareholder and how that decision is made. It should also define what happens when a shareholder leaves. This includes notice periods, how valuations will be handled, who can buy their shares and under what terms.
Good leaver vs bad leaver The way an exit is handled may differ based on the reason. Retirement or illness will often be treated differently from resigning to start/join a competing firm. The agreement can spell out these distinctions and how the value of the exiting shareholder's equity will be determined in each case.
Valuation methodology Having a clear, agreed valuation method can avoid conflict at the time of an exit. It is wise to include not just a general approach but a working example. Some firms go further and commission formal valuations annually or every two years, so there are no surprises – a valuation insurance policy so to speak.
Dispute resolution In the absence of a formal process, disputes can become personal and drawn out. A good agreement will outline the steps that must be taken to resolve issues, such as engaging in mediation before initiating legal proceedings.
Death or incapacity If a shareholder dies or suffers total and permanent disability, the agreement should detail what happens next. Are there timeframes for payout? Are there insurance policies in place to fund a buyout? Is there clarity around the role of the estate?
Restraints and default events The agreement should also cover what happens if a shareholder breaches their obligations or is no longer fit to remain involved. This includes events like bankruptcy or criminal conduct, and how these events trigger an exit or loss of shareholding.
When it works
A five-partner professional services firm had a shareholder suffering from burnout who needed to step away quickly. Because there was an agreement in place, the partners followed the steps already set out. The business was revalued, the good leaver clauses were applied, and the transition was finalised in two weeks.
A three-partner business lost a shareholder in a motorsport accident. The agreement and supporting insurances ensured the widow was paid out within weeks. The business continued operating and was able to make interim arrangements with minimal disruption.
A six-partner multidisciplinary firm handled the departure of an owner who decided to pursue another career. Because of the existing agreement and annual valuation practice, the exit was orderly and respectful. The succession plan was adjusted, and the relationships remained intact.
When it does not
We assisted a financial adviser who owned 33 percent of a firm and exited without a shareholder's agreement in place. The remaining shareholders commissioned a valuation, which undervalued his equity by around eight hundred thousand dollars. The valuer was not experienced in financial services and the process lacked transparency. The adviser was paid out the lower figure with no negotiation. The matter is now in court. Worse still, the restraint clause he was relying on does not appear to be enforceable. He is now competing for the same clients.
Final word
A shareholder's agreement is not about anticipating the worst. It is about putting clear, fair expectations in place while everyone is on the same page. You hope you never need to rely on it. But if the day comes, having a solid agreement in place could save your business, your reputation and your relationships.
If you are setting up a shareholder's agreement or reviewing an old one, it is worth getting advice from a team who understands the nuances of valuation, succession and business continuity. It is one of the best decisions you can make, get in touch if you’d like to chat this over for your firm.
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