Amid the excitement of setting up a new business venture - or when everything’s going well - one of the most unthinkable questions can often be: “What happens if we fall out?”.
Unfortunately, though, circumstances can - and do - change. People will not always agree. That is especially true when wider economic tensions place a strain on the finances of the business, or when personal or ideological views begin to differ and priorities shift.
The reality is that too few business partners are having that, perhaps awkward, “what if?” conversation at the time it matters most: when they are getting along. Particularly in family businesses and SMEs, where failing to do so simply adds to stress, uncertainty, and financial risk if things do change or a parting of the ways becomes necessary.
A growing risk: disputes on the rise
These are facts borne out in the rising number of shareholder disputes recorded across the United Kingdom in recent years. Some can rumble on for many years too.
Scottish Government statistics show that 120,000 businesses were ‘launched’ between 2000 and 2024. It is likely that most began trading without a shareholders’ agreement in place.
That is a critical strategic mistake. Even if you think you are doing the right thing by waiting for a day when time and resources are not so tight, it can be a false economy. Being forced to resolve a dispute is always more costly than taking proactive steps to prevent one.
Failing to have the right mechanisms in place to address potentially contentious issues in advance can stall the growth of the business, or even jeopardise its future.
What should a shareholders’ agreement include?
Disagreements over whether to invest for the future or pay dividends, the differing extent to which shareholders are involved in or contribute to the business and who exercises control over decision making and succession planning can all lead to situations where people no longer wish to carry on working together.
It can be difficult, particularly when working with friends or family - and where any fall-out ultimately feels more personal.
Yet - just like a Will or Power of Attorney in your personal life - putting in place contingency plans and procedures will help protect the future of the business and those who could be affected by any decisions made, including the loved ones left behind in the event of a shareholder’s death.
A shareholders’ agreement can, among other things, include provisions relating to the transfer of shares (including compulsory transfers of shares on the event of a death or bankruptcy of a shareholder), the distribution of profits, the management and control of the company (including the frequency and format of shareholder meetings) and dispute resolution mechanisms.
The precise contents will depend on the specific circumstances of those involved.
Planning for the unexpected: a business essential
Any suggestion that a shareholders’ agreement is a sign of anticipating failure is misguided. Indeed, I would argue that the opposite is true.
They are about safeguarding the wellbeing of businesses and their shareholders by preparing for as many eventualities as possible, especially at a time when the demands on SMEs have never been greater amid the rising cost of doing business.
We want businesses to be in a position where they can seize growth opportunities and success, not to have their prosperity threatened or delayed because of disputes among the owners.
Greater recognition of the part that shareholders’ agreements can play would help many more achieve their potential.
Published 19 May 2025
