Clarity in company law: the importance of having a shareholder agreement

Introduction

A shareholder agreement is, without doubt, one of the most important documents you can have when setting up a new company. Notwithstanding this, experience in dealing with corporate disputes has shown that most people incorporating new companies never even consider the possibility of having such a document. Worse still, many lawyers and those who sell "off the shelf" companies fail to draw their clients' attention to the importance of having one. Indeed, company incorporation has today become a fast-track conveyer belt involving a 2-page pro forma constitution, some decorative paper representing "share certificates" and, if you are willing to pay for the premium service, a fancy contraption being the "company seal". It is often overlooked that the 2-page constitution is wholly inadequate to cater for the kinds of situations likely to arise in the company's future or that, at the very least, the company should have a separate shareholder agreement to cater for some of those situations. Many of the "situations" I am thinking about are those involving disputes between the shareholders. A significant number of of those disputes end up in court costing the company and its shareholders vast amounts of time and money when they could easily have been settled or prevented altogether by having a shareholder agreement.

The purpose of this information sheet is to answer some essential questions about shareholder agreements for company directors, shareholders and those thinking of going into business in Ireland.

What is a shareholder agreement?

A shareholder agreement is a legally binding contract between the shareholders of a company and the company itself. They all sign the document and, in doing so, enter into the agreement with all the other signatories. As a result, one party who breaches the terms of the agreement can, subject to the agreement itself, be sued by any of the others.

What are the advantages of having a shareholder agreement?

The main benefit is clarity and certainty for each shareholder. A well-drafted shareholder agreement will make provision for almost every situation likely to arise in the company's lifetime and, as such, everyone knows where they stand. For example, the agreement will often state that a shareholder who wishes to sell his/her shares must first offer them to the existing shareholders before offering them to a third party. This ensures that a shareholder cannot unilaterally bring outsiders into the business without the approval of the existing shareholders. By making provision for these situations, the shareholder agreement acts a as a point of reference for resolving disputes. Our experience of shareholder disputes has been that they escalate to the point of litigation primarily in those cases where the company did not have a shareholder agreement in place.

Is it a pro forma document?

No. There is little point in having a shareholder agreement unless it has been well drafted and tailored to the specific requirements of the shareholders in question. A poorly drafted legal document creates ambiguity and, as such, facilitates rather than minimises the possibility of disagreement. Although the headings and subject-matter of shareholder agreements tend to be similar, the actual clauses must cater to the needs of the individual company. The person drafting the agreement cannot guess or assume what those needs are – they can only be established from detailed conversations with the company's shareholders/directors.

What is the difference between a shareholder agreement and the company's constitution?

A shareholder agreement tends to be more detailed and deals with the "nitty-gritty" or day-to-day matters arising in a company. The constitution deals with more general matters involving the company itself rather than the relationship between the shareholders. For example, a shareholder agreement would normally provide a detailed point-by-point procedure for raising and determining disputes among shareholders. While there is nothing preventing such a procedure also being contained in the constitution, it is a less appropriate place for it because it would result in the constitution potentially running to hundreds of pages. Moreover, a company's constitution cannot be enforced by the shareholders as a simple contract in the same way as a shareholder agreement can. Finally, the constitution can only be amended with a special majority vote, meaning a 75% vote, whereas a shareholder agreement can provide bespoke mechanisms for its amendment.

Is it too late for a company to introduce a shareholder agreement if it did not have one upon incorporation?

No. A shareholder agreement can be introduced at any time, regardless of the company's age or stage in its corporate life. Therefore, a trading company which does not already have a shareholder agreement in place can still introduce it to its existing members.

Does every shareholder have to sign a shareholder agreement? What happens if some shareholders refuse to sign?

The shareholders are not obliged to sign a shareholder agreement. If they do not sign or otherwise agree to it, they are not bound by it. That would lead to an entirely unsatisfactory situation where some of the shareholders are bound by the agreement and others are not. It should be resolved by entering into discussions and negotiations with the non-signing shareholders and amending the document to address their concerns. As previously mentioned, the agreement is a commercial document and it is therefore not unusual to have to negotiate its terms with each class of shareholders.

How do we amend a shareholder agreement?

Amendments are common, as they are in most contracts. In that situation, it is recommended for every shareholder to sign the amended agreement which then replaces the previous one. If some of the shareholders do not sign the amended contract, the terms of the former contract continue to apply to them unless that contract is terminated with their agreement. For this reason, it is a good idea to try and avoid amendments and to ensure the first agreement is as thorough and detailed as possible.

How can the directors of a company ensure that new shareholders will sign the shareholder agreement?

When a shareholder sells his/her shares to a third party, that person enters into a contract for the purchase of the shares. The contract is with the selling shareholder and not with the company or its directors. As such, the best way for a company to procure the new shareholder's signature is to include a clause in the shareholder agreement which was signed by the outgoing shareholder to the effect that he/she will include in the contract for sale a provision that the purchase will sign the shareholder agreement. This does not guarantee the purchaser's signnature since it is possible the outgoing shareholder will breach this requirement and fail to include such a provision in the contract for sale (in which case the company will have a remedy against the outgoing shareholder but cannot force the new shareholder to sign the agreement). There may however be other, fact-specific, options open to the company which are beyond the scope of this information sheet and should be discussed with your legal adviser.

I am a shareholder in a company and I have recently been presented with a shareholder agreement to sign. Should I sign it?

It is important that you read and understand every clause in the agreement before signing since you will be bound by it after it is executed. If you are not comfortable with any aspect of it then you should not sign it until you have obtained independent legal advice. We would not recommend seeking clarifications from the company's directors or the company's solicitors in this situation since they are representing the company and not you. Verbal assurances from the directors or other shareholders should also not be relied upon if they are not expressly included in the document.

What happens if our company does not have a shareholder agreement?

There is no legal requirement for a company to have a shareholder agreement. Not having one does not prevent the company from trading as normal. Indeed, a company will probably not miss it in its first few years of trading. But as the company matures and big decisions need to be taken, a shareholder agreement is an invaluable document for governing how those decisions should be made, who should make them and what should happen if some shareholders do not agree. Without a shareholder agreement, a disgruntled shareholder is left with only statutory rights and remedies which are much more difficult and complex to enforce than the contractual remedies contained in the agreement. This issue is compounded by the fact that many Irish companies are "off the shelf" companies incorporated by company incorporation businesses (usually not lawyers) with a 2-page pro-forma constitution lacking important details. This means that the company has no document whatsoever, neither a constitution nor a shareholder agreement, making provision for key aspects of its business.

What happens if there is a conflict between the terms of the constitution and the shareholder agreement?

This depends on the specific wording of each document. It is not uncommon for the shareholder agreement to expressly provide that it will take precedence over the contents of any other document, including the constitution. There are however some aspects of company law which cannot be altered by agreement, and any contrary clause contained in either the shareholder agreement or constitution will likely have no effect.

Our shareholder agreement appears to give all the power to a small group of shareholders. Is this legal?

In most cases, yes. The parties to a shareholder agreement are free to allocate important decision-making powers to a small group of shareholders if they wish. In practice, this normally happens where that small group of shareholders provided significant funding to the company. Whether or not you should sign such an agreement is, of course, a different matter which will depend on the specific circumstances of each case. A shareholder agreement should certainly not be used as a tool of oppression against a group of shareholders. If it is, even if those shareholders signed the agreement, they may have remedies under the Companies Act 2014 and under general contract law.

Our company has shareholders based in other countries. Can the shareholder agreement be drafted so that they can pursue their remedies in those countries rather than in Ireland?

Yes. It is common to include a "jurisdiction" clause in contracts which will specify where proceedings relating to the contract can be instituted. In the absence of such a clause, there are default rules for determining the appropriate forum in which to bring proceedings.

Does Corporate Legal offer a shareholder agreement drafting service? If yes, how much does it cost?

Yes. Drafting commercial agreements, including contracts and shareholder agreements, is a key part of our practice. Shareholder agreements are not drafted from templates and, as such, are time-intensive. Fees for such documents can vary significantly depending on the specific requirements of each client. For example, some clients may request that the document should contain very complex share class structures which can run into many clauses of drafting work. In general, the fees for a shareholder agreement range between €2000 and €5000 plus VAT. We will always provide a fixed fee quote prior to commencing work, so please contact us for that.

Author: Mahmud Samad BL
Publication date: 9th January 2026

CORPORATELEGAL