A shareholders’ agreement is the document that says what happens when the scheme does not go to plan. While everything is going well it sits in a drawer, which is why it is often signed without much attention. The points below are the ones that decide whether a difficult scheme stays a business arrangement, and they come up constantly in joint venture partnership work.
This is a commercial checklist, not legal advice and not a model agreement. Each party should take its own independent legal advice, and tax advice should be taken on the structure before signature. Our interest is narrower: the clauses that turn on cost, reporting and the delivery of the building.
Decisions: who can do what, alone
The agreement should separate day to day management from decisions needing both parties. Day to day usually sits with whoever is delivering the scheme, with defined authority: appointing consultants within the budget, administering the building contract, approving variations up to a stated limit, drawing the facility in accordance with the business plan.
Reserved matters are everything else, and the list is worth drafting carefully rather than copying. On a development it typically includes approving the budget and any change to it, exceeding the agreed cost by more than a stated margin, selling units below an agreed price, changing the specification materially, replacing the contractor or the professional team, taking on more debt, and giving any guarantee.
A reserved matters list that is too long paralyses the scheme and one that is too short disenfranchises the passive partner. The practical test is whether the delivery party can run a normal month without a meeting, while nothing that changes the economics can happen without both signatures.
Money in: the agreed budget and what happens beyond it
The agreement should attach the budget and the business plan the parties have agreed, so that there is a documented baseline. Without it, every later discussion about an overrun becomes a discussion about what the budget was.
Then the overrun mechanism. Who funds additional cost, in what proportion, on what notice, and what happens if a party will not or cannot. The usual options are pro rata contributions, a shareholder loan from the party who can fund it at an agreed rate, or dilution of the non-contributing party on a stated formula. Each should be written with a worked example attached.
Dilution clauses in particular need testing on numbers before signature, because a formula that looks even-handed in principle can be severe in practice. The time to understand that is while both parties are still negotiating, which is the point made about the whole structure in how a development joint venture is structured.
Money out: the order of returns
The agreement should state the waterfall: debt repaid first, then capital contributions returned, then profit split on the agreed basis, with any preferred return or step in the split spelled out. It should also say what happens with receipts arriving before the scheme is complete, which is the normal position on a scheme sold in units.
Distributions need a mechanism rather than goodwill: when cash can be taken out, who decides, and what reserve has to be retained against remaining cost, retention and defects. A joint venture that distributes early and then needs money back has a problem no clause can tidy up afterwards.
Fees paid to a party for delivering the scheme belong here too, stated as a scope and an amount, so that they are not later characterised as a disguised distribution.
Delay, default and what counts as failure
The agreement should define what a party failing looks like: not funding when called, not delivering the scope it undertook, insolvency, or a serious breach. Then the consequence, which may be dilution, a right for the other party to take over management, a buy-out at a defined price, or a sale of the scheme.
Programme delay deserves its own treatment on a development, because delay costs money through finance and holding costs and changes the sales period. Where one party is delivering, the agreement can require the programme to be reported and a recovery plan to be produced once slippage passes a threshold, which is a reporting obligation rather than a penalty.
For any of that to be usable, the facts have to be established independently. Delay and cost positions asserted by the party responsible for them are not a basis for invoking a clause, which is why monthly measured reporting matters. The format is described in forecast final cost: the number investors should watch.
Exit, deadlock and the end of the scheme
Three situations need a route. A party wanting to sell its share, both parties wanting out, and the parties unable to agree on a reserved matter. Leaving any of them undocumented means the answer is negotiated at the moment of least goodwill.
The common mechanisms are pre-emption rights so a share is offered to the other party first, a valuation method for a share, a put and call arrangement at defined trigger points, and a deadlock procedure escalating to senior representatives and then to a defined route. Whether any particular mechanism suits your arrangement is a question for your solicitors.
The agreement should also say what happens at the natural end: the final account being settled, retention released, defects dealt with, warranties assigned to buyers, the company wound up and the records kept. Those are the items most often left hanging for a year, and the ones that bring parties back into contact after everyone has moved on, which is why final accounts and disputes work belongs in the plan rather than in the aftermath.
What to settle before the lawyers start drafting
The commercial points, in writing, between the parties: contributions and their values, the budget, the waterfall, the reserved matters list, the overrun mechanism, the exit routes and the reporting obligation. Lawyers draft faster and cheaper from a clear commercial position, and the arguments that matter happen while it is being written rather than afterwards.
The cost information behind those points should be independent of both parties, because every mechanism in the agreement depends on numbers somebody has to trust. An independently prepared cost plan at the start and a monthly measured report during the build are what make the clauses operable, and they are ordinary client side quantity surveying and delivery and cost control work, run as part of development management.
This article is general information, not financial, investment or legal advice.
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