Shareholders Agreements: cause or effect?

I have noticed something over the last few years whilst I have been dealing more with smaller family and owner-managed businesses.

I often get asked about a falling-out or dispute between shareholders in the business. Typically these are either about how the other shareholder(s) are managing the business or how to "get rid" of a shareholder who the client can no longer work with.

The first question I usually ask is "have you got a shareholders' agreement?". And the answer is almost invariably no. Sometimes these enquiries are really a storm in a teacup and the shareholders can resolve their differences and carry on. Other times they end up as long, protracted disputes which hamstring the business and cost a fortune in legal fees.

However, I have noticed that I hardly ever get asked to look at a dispute where there is a shareholders' agreement in place and advise on how the shareholders' agreement should be used to resolve it. It does happen, but only very infrequently.

Without getting into philosophical arguments about causality I think it is interesting to speculate on why this is. Does a shareholders' agreement magically prevent business owners from falling out?

As much as I would like to say "yes" I suspect that that the reality is more prosaic. Firstly, the simple act of talking about the kinds of things which might go wrong in the business and how they could be resolved helps everyone involved to go into the venture with their eyes open. Secondly, the knowledge that there is a "fallback" mechanism in place if things go wrong encourages people to actually negotiate a sensible solution without involving the lawyers, rather than taking entrenched positions.

There are lots of "reasons" for not getting around to putting a shareholders' agreement in place (uncertainty about the costs, tight cash flow in a new business), but to me this seems like a very good reason to do it at an early stage. Surely it is better than paying expensive legal fees to sort out a dispute later on?

(Shameless plug alert:- Uncertainty about costs shouldn't really be relevant as a reason any more. You can register for an account on our Lees Direct service and fill in the simple interactive questionnaire with details about your business - and I will get in touch with a no-obligation quote for what it will cost to put one in place.)

Has anyone noticed a different pattern or found an area where shareholders' agreements actually lead to disputes? Let me know in the comments.