Most business partnerships start on a handshake and a bank account. Almost none of the messy splits happen with a shareholders agreement in place. The document exists precisely to answer the questions two business partners never think to ask each other while things are going well. It is exactly the document most partnerships skip.
This isn't a case of business owners being careless. It's a case of the conversation being awkward at the one moment it's cheapest to have: the start. For the full list of what a shareholders agreement should cover, see our complete guide to shareholder agreements. This article is about why it keeps getting skipped, and what that costs.
In business with someone? Get the agreement in place while you still agree.
Book a Free Consultation →Who Can Buy a Departing Partner's Share?
Who can buy a departing partner's share? At what price: market value, book value, or an agreed formula? Without a clause answering this before it matters, the negotiation starts from nothing, at the exact moment the relationship has broken down and neither side has any incentive to be generous. The absence of an agreed valuation mechanism turns a straightforward exit into its own dispute, layered on top of whatever caused the split in the first place.
What Happens If Shareholders Reach a Deadlock?
Two equal shareholders who disagree can freeze a company completely. Neither can outvote the other, and if neither will compromise, the business simply stops making decisions. A well-drafted agreement builds in a way through it: mediation, a shotgun clause, or an independent valuation trigger. Without one, the only options are a negotiated buyout under pressure, a court application, or winding up a business that might otherwise be perfectly viable.
Does a Restraint Clause Stop a Competitor?
Can a departing partner set up two streets away and take your best clients with them? Only a restraint of trade clause stops that. Without one, they can walk out on Friday and be competing for the same clients on Monday, using relationships and knowledge built inside the business they just left.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our commercial law team drafts shareholder and partnership agreements for small and medium businesses across Melbourne and Victoria, and we do it while the relationship is strong, not after it has already broken down. Because we are a combined legal and accounting firm, we also advise on the tax and valuation implications of exit and buyout provisions in the same engagement.
The same exit and buyout planning matters when a business is passed to family rather than sold to a co-owner. See our guide on passing a business to the next generation.
Frequently Asked Questions
1. Why do most business partnerships skip a shareholders agreement?
Most partnerships start on a handshake, at a point when the relationship is strong and no one wants to raise what happens if it breaks down. Almost none of the messy splits happen with an agreement in place, because the conversation gets put off until it is too late.
2. What's the exit nobody plans for?
Who can buy a departing partner's share, and at what price. Without a clause answering this before it matters, the negotiation starts from nothing, at the exact moment the relationship has broken down.
3. What happens if two equal shareholders can't agree?
They can freeze a company completely. A well-drafted agreement builds in a way through it, such as mediation, a shotgun clause, or an independent valuation trigger. Without one, the options are a negotiated buyout, a court application, or winding up.
4. Does a restraint clause actually stop a departing partner competing?
Only a properly drafted restraint of trade clause can. Without one, they can walk out on Friday and be competing for the same clients on Monday.