A shareholders agreement for a small company with two owners

Aug 29
3 min read

Updated: 4 days ago

Introduction

A company is incorporated using standard articles supplied with the registration. Two shareholders own it, nobody has read the articles, and there is no further documentation about how they will run the business together.

The articles govern the mechanics of the company. They say almost nothing about what these two people will actually disagree about: how much each takes out, what happens when one wants to leave, who decides what, and whether either can sell to somebody the other cannot work with. That is what a shareholders agreement is for, and most small companies do not have one. The document that governs the mechanics exists; the one that governs the relationship does not.

1. A shareholders agreement for a small company covers what the articles do not

Understand the difference.

Articles are the company's constitution and are largely procedural and public. A shareholders agreement is a private contract between the owners dealing with their relationship, and it can be far more specific.

2. Control who shares can be transferred to

The provision owners most often need.

Pre-emption rights requiring a shareholder to offer shares to the others first, so nobody ends up in business with a stranger, a competitor or a former partner's new spouse. Shares can move through inheritance and divorce without any decision by the remaining owners.

3. Define which decisions need agreement

Beyond the statutory positions.

Borrowing, significant purchases, hiring at a certain level, changing the business, taking on investors, and setting director pay. Listing these prevents one owner committing the company unilaterally.

4. Include a deadlock mechanism

Essential with two equal owners.

A casting vote on defined matters, referral to an independent expert, or a buyout provision. Without one, a single unresolved disagreement can paralyse the company indefinitely.

5. Set out how shares are valued

The clause used in every departure.

A formula, a multiple, or an independent valuation with the valuer agreed in advance. This single provision removes the most contentious element of any exit. Agreeing a method is straightforward; agreeing a number under pressure rarely is.

6. Deal with leavers, and distinguish between them

A standard and useful distinction.

Somebody who resigns, retires, dies or is dismissed for cause are different situations, and agreements commonly treat them differently in valuation and in whether the transfer is compulsory. A founder who resigns after a year and one who dies after fifteen are not the same case.

7. Cover dividends and drawings policy

Where owners' interests diverge.

How profit is distributed, how much is retained, and whether directors' salaries are set by agreement. Two owners with different financial needs will want different answers, and the mechanism should exist before that surfaces.

8. Include reasonable restrictive covenants

Protecting the company from a departing owner.

What a leaver may do regarding customers, staff and competing activity, for a limited period. These must be proportionate to be enforceable in most jurisdictions.

9. Have it drafted for your jurisdiction and reviewed

Not a template exercise.

Company law, tax treatment and enforceability vary substantially. A properly drafted agreement is a modest cost relative to the value it protects, and both owners should understand what they are signing. An agreement neither party can explain is unlikely to be followed when it matters.

Review it when circumstances change: a new shareholder, a significant change in value, a marriage, or one owner reducing their involvement. Agreements drafted at incorporation frequently describe a company and a set of relationships that no longer exist.

Conclusion

Put in place the private agreement that covers what the articles leave out.

Control transfers with pre-emption rights so shares cannot pass to somebody unacceptable, list the decisions requiring unanimous agreement, include a deadlock mechanism where ownership is equal, define how shares are valued, distinguish between different kinds of departing shareholder, set a policy on dividends and retained profit, include proportionate restrictive covenants, have it drafted for your own jurisdiction, and review it whenever ownership or circumstances change.