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The biggest pitfalls of a shareholders' agreement are a missing deadlock clause, no good/bad leaver provision, an unclear valuation method, and inconsistencies with the articles of association. A Shareholders' Agreement (SHA) regulates sensitive agreements between shareholders, and this is precisely where things go wrong: parties enter into agreements hastily upon incorporation, copy a template, or skip difficult topics because the atmosphere is still good. These choices only backfire when a conflict or departure occurs. Below are the mistakes we see most often in practice.
The short answer
- No deadlock provision: with a 50/50 ratio, the BV remains inactive without a breakthrough mechanism.
- No leaver provision: unclear what happens upon the departure or dismissal of a shareholder.
- Vague valuation: “a reasonable price” leads to arguments about the price.
- Conflict with articles of association: SHA and articles of association contradict each other.
- Cut-and-paste model: a SHA that does not align with your situation.
- No tag/drag along: minority shareholder lags behind or blocks a sale.
Pitfall 1: no deadlock provision
The classic mistake involving two shareholders each holding 50%. As long as they agree, everything goes well, but in the event of a fundamental disagreement, neither can force a decision. The company grinds to a halt. Without a dispute resolution mechanism, the only option left is to go to court, resulting in a buyout procedure or dissolution.
A good SHA contains a deadlock mechanism, such as escalation to an independent third party, a shoot-out clause, or mediation as a mandatory intermediate step. This takes little extra time during drafting but prevents months of stagnation.
Pitfall 2: no good/bad leaver scheme
What happens if a shareholder leaves the company, becomes incapacitated, or is dismissed? Without a leaver provision, the departing shareholder simply retains their shares, even if they no longer contribute. A good/bad leaver arrangement links the reason for departure to the price: a good leaver (e.g., retirement or illness) receives the full value, while a bad leaver (e.g., dismissal due to poor performance) receives a lower price. If such an arrangement is absent, you are stuck with an inactive shareholder.
Pitfall 3: unclear valuation
Many agreements stipulate that shares are to be offered upon departure at “a reasonable price” or “market value.” That sounds logical, but when the matter arises, parties often disagree on precisely that price. Concretely define the valuation method: a fixed multiple of earnings, intrinsic value, or a binding valuation by an independent expert with a pre-agreed appointment procedure. This shifts the discussion from “what is reasonable” to an objective calculation method.
Pitfall 4: conflict with the articles of association
The Articles of Association and the SHA must align. In principle, the agreement applies to the relationship between the parties, but the Articles of Association apply to the company and third parties. If they contradict each other, uncertainty arises regarding what applies. A common example: the Articles of Association contain a statutory blocking provision, while the SHA stipulates a deviating obligation to offer shares. Anyone who has the two documents drawn up separately runs this risk.
Pitfall 5: no tag along and drag along
In an external sale, the interests of the majority and minority diverge. Without a drag-along clause , a minority shareholder can block an attractive 100% sale, as a buyer rarely wants to acquire a part. Conversely, without a tag-along clause , the minority is left with a new, unknown co-shareholder when the majority sells. Both provisions should be standard in a Shareholder Share Agreement (SHA), tailored to the control structure.
Pitfall 6: the internet model
A free model as a starting point is not a bad thing, but a SHA that is adopted blindly rarely aligns with your share classes, articles of association, and proportions. Practical example: three founders use a two-person model and forget to adjust that one of them holds a minority interest. During an investment round, it turns out that the voting ratio does not match the share distribution, and everything has to be revised after all, precisely at the most expensive moment.
Honest recommendation
Most pitfalls arise because parties postpone difficult topics. Do address deadlock, leaver arrangements, valuation, and tag/drag along, and do so at incorporation. Moreover, a legal expert ensures consistency with the articles of association. You do not need a legal expert to review an existing, well-functioning Shareholder Agreement annually: that is sensible work in-house. However, when drafting or when there is a change in the shareholding structure, professional review is well worth the small effort.
Read more: the shareholders' agreement, a complete checklist , and the process of having one drafted.
Frequently Asked Questions
The absence of a deadlock mechanism in a 50/50 ownership structure. Without a breakthrough mechanism, the business grinds to a halt in the event of a conflict, leaving only the courts as an option. A dispute resolution mechanism prevents months of standstill.
Because parties will disagree precisely on that price at the moment it becomes relevant. Establish a concrete valuation method: a fixed multiple, the intrinsic value, or a binding valuation by an independent expert with a fixed appointment procedure.
A copied model rarely aligns with your share classes, articles of association, and control structure. This leads to conflicting provisions and uncertainty. Often, this only becomes apparent during an investment round or sale, precisely at the most expensive moment.
Tag along gives the minority the right to co-sell under the same conditions as the majority. Drag along gives the majority the right to compel the minority to co-sell to an external buyer. Both are standard in a SHA.
In principle, the agreement applies between the parties, but the articles of association apply to the company and third parties. Inconsistency creates uncertainty. Therefore, have the SHA and the articles of association aligned, preferably by the same advisor.
A provision that links the reason for departure to the price. A good leaver (retirement, illness) receives the full value; a bad leaver (dismissal due to poor performance) receives a lower price. Without this arrangement, an inactive shareholder simply retains their shares.
Yes, but only with the consent of all shareholders. As long as relations are good, adjustments are easy. If tension arises, the party benefiting from a defect will rarely be willing to cooperate. Therefore, rectify the situation in a timely manner.
