Bret Gower | October 4, 2026
Many business owners spend significant time planning how to grow their business, but very little time preparing for what happens when shareholders disagree, want to exit, become incapacitated or simply have different views about the future.
That is where a shareholders' agreement becomes critical.
A shareholders' agreement sets out the rules governing the relationship between shareholders, including how important decisions are made, how shares can be transferred and what happens when circumstances change.
For any company with more than one shareholder, having a tailored shareholders' agreement in place can provide certainty, protect relationships and reduce the risk of costly disputes.
What is a shareholders' agreement?
A shareholders' agreement is a legal agreement between the shareholders of a company that sets out how the company and the relationship between its shareholders will operate.
It can establish clear processes for making decisions, bringing in new shareholders, transferring shares, resolving disagreements and dealing with events such as the death or incapacity of a shareholder.
Most importantly, it allows shareholders to agree on these things before there is a problem.
Why is a shareholders' agreement important?
Most shareholder disputes do not arise because people intended to fall out.
They arise because circumstances change and there is no agreed process for dealing with a situation nobody anticipated when the business started.
A well-drafted shareholders' agreement can provide certainty around:
- how major business decisions will be made
- the appointment and removal of directors
- shareholder voting rights
- the introduction of new shareholders
- dividend policy and funding obligations
- share transfers and exits
- the death, incapacity or retirement of a shareholder
- dispute resolution and deadlock procedures.
Agreeing on these matters while relationships are good can make difficult situations considerably easier to manage later.
What happens when a shareholder wants to leave?
Every shareholder will eventually leave the business, whether through retirement, sale, illness, incapacity or death.
Without an agreed mechanism for dealing with that transition, uncertainty can arise at precisely the time when the business needs stability.
A shareholders' agreement can establish:
- who can buy a departing shareholder's shares
- how the shares will be valued
- whether existing shareholders have the first right to acquire the shares
- what process applies following the death or incapacity of a shareholder.
Addressing these issues early can help avoid disputes and protect the continuity of the business.
What happens if shareholders disagree?
Disagreements between shareholders can happen even in successful businesses.
Problems can become particularly difficult when shareholders have equal voting power and cannot agree on an important decision. Without a process for resolving that deadlock, the business itself can suffer.
A shareholders' agreement can set out an agreed process for dealing with disputes or deadlocks before they escalate.
The appropriate process will depend on the business and its ownership structure, which is one reason a shareholders' agreement should be tailored rather than treated as a generic template.
Do family businesses need a shareholders' agreement?
Yes. In fact, family businesses can have even more reason to put clear agreements in place.
Many family-owned businesses operate without a shareholders' agreement because relationships are strong and there is a high level of trust.
However, ownership transitions, succession planning and differing expectations between family members or generations can create challenges that are difficult to navigate without an agreed framework.
A shareholders' agreement helps separate family relationships from business decision-making and provides greater certainty when difficult issues arise.
When should you put a shareholders' agreement in place?
Ideally, shareholders should agree on how their relationship will work at the beginning of their business relationship, rather than waiting until a disagreement arises.
However, it is not too late if your company is already operating without one.
An existing shareholders' agreement should also be reviewed when there are significant changes to the business or its ownership structure to make sure it still reflects how the business operates and what the shareholders intend.
Is a shareholders' agreement worth the cost?
Preparing a shareholders' agreement is an investment in preventing problems rather than dealing with them after they arise.
The cost of putting an appropriate agreement in place is usually minor compared with the potential cost of resolving a shareholder dispute.
A properly drafted agreement can reduce uncertainty, protect relationships and provide a practical framework for navigating issues that arise throughout the life of the business.
In short, if your company has more than one shareholder, a shareholders' agreement is an important part of managing business risk.
How our Business & Commercial Law team can help
Smith and Partners advises business owners on drafting, reviewing and negotiating shareholders' agreements that reflect the needs of their business and ownership structure.
We provide practical, commercially focused advice designed to minimise risk and support long-term business success. We can also assist where a shareholder dispute has already arisen.
If your business does not currently have a shareholders' agreement, or your existing agreement no longer reflects how the business operates, talk to our Business & Commercial Law team about putting the right agreement in place.
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Is a shareholders' agreement legally binding?
A properly prepared and executed shareholders' agreement is a legally binding agreement between the parties to it. It is important that the agreement is drafted to reflect the particular company, its shareholders and how they intend the business to operate.
Does every company need a shareholders' agreement?
A company with only one shareholder generally doesn't need an agreement governing the relationship between multiple shareholders. However, where there are two or more shareholders, putting clear rules in place can significantly reduce uncertainty and the potential for future disputes.
Can we use a shareholders' agreement template?
A template may not adequately address the ownership structure, decision-making processes, funding arrangements or risks specific to your business. A shareholders' agreement should reflect how your particular company and its shareholders intend to operate.
What happens if we don't have a shareholders' agreement?
Without a shareholders' agreement, there may be no agreed process for dealing with matters such as a shareholder wanting to leave, the valuation and transfer of shares, deadlocked decisions or the death or incapacity of a shareholder. This can create uncertainty and increase the potential for disputes.
Can an existing shareholders' agreement be changed?
Yes. Shareholders' agreements can be reviewed and updated as a business evolves. If your existing agreement no longer reflects the ownership, operation or future plans of the business, it is worth having it reviewed.
Important information
This article provides general information only and does not constitute legal advice. Every situation is different, and you should obtain legal advice specific to your circumstances before making any decisions or taking action based on this information.
In accordance with our obligations under the Lawyers and Conveyancers Act 2006, Smith and Partners cannot provide legal advice until you have become a client and received our Terms & Conditions of Engagement and Information for Clients.
Please note that we require a retainer to be paid before your first meeting and cannot assist with legal aid matters.
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