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A good business partner today may become an opposing party tomorrow — a shareholders’ agreement is therefore not a matter of distrust, but a matter of protecting the business.
From many years of experience in business law, we have seen that many companies begin with trust: close friends starting a business together, siblings setting up a company, two founders each holding 50% of the shares, or a family establishing a company to manage shared assets.
When the business is still small, everything seems simple. Discussions are made verbally. Agreements are made like family. No one expects that problems will arise. However, once the business begins to generate income, own assets, have customers, incur liabilities, hire employees, or increase in company value, even a small difference in opinion may quickly turn into a serious conflict.
Shareholder disputes are therefore not something far removed from business reality. They do not occur only in large companies, but can also happen in startups, SMEs, family businesses, and companies with only two or three shareholders. If such disputes are left unresolved for too long, they may lead to the collapse of the business.
This article will help you understand the risks of shareholder structures and how legal tools can be used to protect your company before it is too late.
The 50:50 Shareholding Trap and What Is a Deadlock?
When starting a business, founders often divide their shareholding on a 50:50 basis because they see it as the “fairest” number. However, legally and practically, this can be the most dangerous shareholding structure.
- Deadlock means a situation where shareholders or directors are divided into two equal sides. This includes cases where directors from both sides refuse to sign jointly, causing the company to be unable to enter into contracts or pass resolutions on important matters, such as borrowing money, approving financial statements, or appointing additional directors.
- Impact: When neither side gives way, the company may enter a state of “paralysis”. It cannot move forward, while competitors may overtake the business immediately.
Shareholders’ Agreement: A Strong Protective Shield for the Business
Many people hesitate to enter into a shareholders’ agreement before starting a business because they feel that “if we start with a contract, does that mean we do not trust each other?”
In reality, the opposite is true.
A good shareholders’ agreement is not created to catch each other out. It is created to set the rules in advance, at a time when all parties can still communicate well, remain reasonable, and share the same business direction.
Once a dispute has already occurred, negotiations are often no longer about finding the best solution for the company. Instead, they may become about protecting each party’s own interests.
A shareholders’ agreement is therefore like the company’s “backup plan”. It does not make the business fall apart faster. Rather, it helps prevent disputes from unnecessarily destroying the business.
To prevent deadlock and other disputes, a shareholders’ agreement, or SHA, is an important document that all co-founders should have before starting the business. It is not a symbol of suspicion, but a clear set of rules designed to avoid litigation in the future.
The key clauses that should be included in an SHA to protect your business are as follows:
Clause | Meaning | Benefit to the Business |
Reserved Matters | Important matters that require a “special resolution” or special approval, such as 75% or more, instead of a normal majority vote. | Protects minority shareholders from having major decisions rushed through by majority shareholders, such as capital increases or the sale of key assets. |
Deadlock Resolution | A mechanism for resolving a deadlock when shareholders or directors cannot reach an agreement. | Helps prevent the company from being stuck in a situation where no decision can be made for a long period of time. |
Drag-along Right | The right of shareholders, subject to agreed conditions, to require other shareholders to sell their shares together when there is a major sale of the business or a significant share sale. | Benefits majority shareholders. If an investor wishes to purchase the entire business, the majority shareholders can require minority shareholders to sell their shares as well, so that the deal does not collapse. |
Tag-along Right | The right to “tag along” and sell shares together with the majority shareholders. | Protects minority shareholders. If majority shareholders are leaving the company, minority shareholders can also sell their shares at the same price and on the same terms. |
Non-compete | A restriction preventing shareholders from operating a business that competes with the company. | Prevents a situation where a shareholder leaves after a dispute and takes the customer base or trade secrets to open a competing business. |
If There Is No Shareholders’ Agreement and the Shareholders Are Already in Dispute — What Can Be Done?
If the company did not prepare a shareholders’ agreement from the beginning and a dispute has already arisen, resolving the problem will be more challenging. However, this does not mean that the situation has reached a dead end.
The following are possible steps to find a solution:
- Review the company’s “basic rules”
Start by reviewing the memorandum of association, articles of association, shareholder structure, directors’ authority, signing authority, procedures for calling meetings, voting procedures, and restrictions on share transfers.
In many cases, important solutions or limitations may already exist in the company’s documents, but they have simply never been used in practice.
- Proceed through meetings strictly in accordance with the law
If the parties cannot reach an agreement, decisions may need to be made through board meetings or shareholders’ meetings.
Caution: All legal procedures must be fully complied with. If a meeting is improperly called or a resolution is unlawfully passed, this may create an opportunity for the other party to file a claim to revoke the resolution under the law.
- Negotiate a share buyout to “separate” the parties
If continuing the business together is no longer possible, a structured separation may be the best solution. This may involve appointing an independent valuer to determine the share value so that one party can buy out the other party’s shares.
Most importantly, the matter should end with a carefully drafted settlement agreement. Verbal agreements should be strictly avoided.
- Assess the damage and collect evidence
If there are signs of bad-faith conduct, such as secretly transferring company funds or secretly opening a competing business, all evidence should be collected immediately, including statements, contracts, emails, and chat records, in order to prepare to protect legal rights.
- Rely on court proceedings as a last resort
If negotiations fail and the company has genuinely suffered damage, litigation, such as a civil claim for breach of contract, a claim against directors for liability, or a petition for the court to order dissolution of the company, may become the final legal tool.
Important point before filing a lawsuit: A dispute between shareholders is an “internal war” that must be carefully planned with lawyers. Court proceedings often directly affect the company’s reputation, customer confidence, employee morale, and company value.
Conclusion: Do Not Wait Until the Fire Starts Before Buying a Fire Extinguisher
Shareholder Disputes is a natural issue that can arise in any business. However, damage that spreads until the company collapses can be “prevented”.
If you are starting a business, raising funds from investors, or even beginning to see signs of internal conflict within the company, consulting a legal professional to prepare a well-drafted shareholders’ agreement or to find a solution for dispute negotiations is one of the most worthwhile investments to protect the business value that you have built.
A shareholders’ agreement is not a document for the day when parties no longer trust each other. It is a document that protects the company while all parties still want the business to continue moving forward.
