When business partners go their separate ways: Why every company needs a shareholder agreement

After years of practicing law, it still surprises me that the number one reason shareholder agreements fail is that most companies simply don't have one.

Just like marriage, most couples skip the prenup. But here's the critical difference... While your marriage may end in divorce, your business relationship will eventually be tested. That's not pessimism. It's certainty.

Corporations can live for eternity. Your business relationship, however, is certain to come to an end. At some point, someone will want to sell, need capital, stop performing, or die. When that moment comes, you'll either have a document that covers you, or you won't, and wish you did.

The second most common problem is that most shareholder agreements are subpar. Clients often come to us, asking for "just a standard agreement," as if such a thing exists (although I will admit that we are working on it). 

So, what should a shareholder agreement actually cover?

• Transfer of shares: Does your business partner need to offer you their shares before selling to someone else?

• Death or incapacity: What happens if they die? Are you suddenly in business with their estate (and heaven forbid, their families)?

• Performance and accountability: Can you force out an underperforming partner? Can you trigger a buyout?

• Dispute resolution: Should you include a shotgun clause?

If you talk to most successful business people, they'll tell you their shareholder divorces are where the real pain points come from. Like an imploding marriage, they are expensive. Time-consuming. Gut-wrenching.

Your shareholder agreement is insurance you will use someday. Trying to negotiate after the fact rarely ends well. Don't wait until you need it to find out you don't have one.

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About Outsiders Law

At Outsiders Law, we help business partners navigate the complex realities of growth, transition, and change with practical, plain-language legal solutions. If you’d like to learn more about shareholder agreements or have your existing one reviewed, contact us for a consultation.