What Business Partners Should Settle Early: Roles, Exit, Disputes

Why a shareholder agreement has to be written in good times

Whoever founds a company together or takes a partner into the business is usually optimistic at that moment. People know each other, trust each other, and want to make progress. Questions like "What happens if one of us wants out?" or "What if one of us dies?" then seem out of place. That is exactly why they often remain unanswered until they arise on their own, and then under the worst possible conditions.

By shareholder agreement I mean here the written rules that a company's owners agree among themselves. For a GmbH, the German limited liability company, these are the articles of association, often supplemented by an agreement between the shareholders only. For a GbR, a German civil-law partnership, it is the partnership agreement. The question this article sets out to answer: Which topics should business partners settle early so that their agreement holds in a dispute?

To answer it, I first introduce a thinking model from contract theory. Then I go through the six most important topics, weigh two views on splitting the shares, and show how a conversation about the agreement can be structured. This article is not legal advice. For drafting, you need support from a lawyer, a notary, and a tax advisor.

The thinking model: contracts are always incomplete

In the 1980s and 1990s, the economists Sanford Grossman, Oliver Hart, and John Moore developed the theory of incomplete contracts. Their starting point is simple: no contract can foresee all future situations and set a solution for each. That would be too expensive, and many situations are not even conceivable when the contract is signed. Hart received the Nobel Prize in Economics for this work in 2016, together with Bengt Holmström.

An important distinction follows. A contract can try to fix outcomes: who runs which area, how high a buyout is. But it can also fix procedures and decision rights: who decides when something happens that nobody foresaw, and by what route. Hart calls the right to decide in unregulated cases residual control rights. Whoever holds them has the stronger position in a dispute.

An everyday analogy: a shared apartment cannot decide in advance who takes out the trash in every conceivable week. But it can agree to decide the cleaning schedule together once a month and to draw lots if there is disagreement. The second rule is shorter and lasts longer.

A good shareholder agreement does not say how every dispute ends. It says how a decision is made when the partners cannot agree.

The six topics that belong in every shareholder agreement

The article conflicts between business partners names six points for prevention: responsibilities, deadlock decisions, information rights, exit, valuation, and dispute resolution. The following overview takes up these points and adds what else needs to be considered when drafting an agreement.

1. Roles and involvement

   Who works in the business and to what extent, who runs which area, how is the work compensated? And what happens if someone works less than agreed? Without this rule, the question of who contributes more becomes the most common point of dispute.

2. Shares and information rights

   How are the shares distributed, and what do they stand for? Which figures does each shareholder receive and when, including one who is not involved in day-to-day business?

3. Decisions and deadlock

   Which decisions require a simple majority, which unanimity? What happens in a deadlock between two equally strong shareholders, for example moderation, an advisory board with a casting vote, or a fixed procedure?

4. Exit and transfer

   Under what conditions may a shareholder give notice or sell their share? Does a transfer require the consent of the others? What applies in case of death, divorce, incapacity, or gross misconduct?

5. Valuation and buyout

   By what method is a share valued, who appoints the expert, and in what installments is a buyout paid without overburdening the business?

6. Dispute resolution

   Is mediation or arbitration provided for before going to court? Who bears the costs?

What German law prescribes and where the agreement can shape things

The law settles many questions if the agreement is silent. But the statutory rule often does not fit the business. Some points that come up again and again in practice are the following. They are simplified and do not replace a review of the individual case.

• Form: under Section 2 of the German Limited Liability Companies Act (GmbHG), the articles of a GmbH must be notarized. The transfer of shares and the obligation to transfer them must also be notarized under Section 15 GmbHG.
• Consent to transfer: under Section 15(5) GmbHG, the articles can make the transfer of shares subject to further conditions, in particular the company's consent. This prevents a share from passing to third parties without the others' agreement.
• Redemption: under Section 34 GmbHG, the articles can provide for a share to be redeemed, for example in case of gross misconduct or a shareholder's insolvency. According to the case law of the Federal Court of Justice, the buyout must then be payable from free assets without impairing the share capital.
• Buyout clauses: contractual limits on the buyout, for example to book value, are common. But if the agreed buyout is grossly disproportionate to the actual value, the departing shareholder can demand an appropriate buyout according to the case law of the Federal Court of Justice.
• GbR since 2024: since January 1, 2024, the German Act to Modernize the Law on Partnerships has applied. Since then, the death of a partner in a GbR with legal capacity generally no longer leads to its dissolution but to the departure of the deceased. Special rules apply to a GbR with only two partners. Also new is the partnership register, in which a GbR can be entered.

Two views: equal or unequal shares?

The first question for many founding teams is how to split the shares. Two founders, fifty-fifty, seems fair and avoids a difficult conversation. Research sees this choice in a more differentiated way.

The first view favors equal shares. They signal that everyone contributes equally and has an equal say. Unequal shares can cause resentment. Weissenböck, Breugst, Patzelt, and colleagues (2024) argue theoretically and with data from 82 founders that very high personal stakes can also encourage possessiveness and the defense of one's own territory. According to them, the relationship between equity and identification with the team is not linear.

The second view favors a split by contribution. Hellmann and Wasserman (2017) found that founding teams with an equal split are less likely to raise money from outside investors. Noack, Miller, and Guidice (2021) followed 137 lead founders in the early phase for a year. Teams with an unequal split more often got past the initial phase and launched a functioning business. The authors speak of the heavy cost of harmony.

Both research teams themselves name an important limitation. Hellmann and Wasserman do not consider the relationship causal but a consequence of which teams choose an equal split. Experiments by Kagan, Leider, and Lovejoy (2020) point in the same direction: teams with high contributions tended to choose unequal contracts, teams with lower contributions equal ones. My assessment: the split itself matters less than the conversation that leads to it. Whoever chooses equal shares should do so because the contributions really are equal, not to avoid an uncomfortable conversation.

How a conversation about the agreement can be structured

A shareholder agreement is best developed in several steps, not in a single appointment with the notary. The following sequence has proven itself as a framework and can be adapted to the size of the business.

• Each shareholder writes down what they expect from the business in ten years: income, working hours, sale, handing it on to the family.
• The six topics are answered one by one and the answers compared.
• For each difference, decide: outcome rule or procedural rule.
• A lawyer drafts the agreement, and a tax advisor reviews the consequences of buyout and transfer.
• The draft is discussed with spouses if marital property regimes or inheritance are affected.
• A review date is set, for example every three to five years or when new shareholders join.

In family businesses, family, ownership, and business also overlap. How these circles are kept cleanly apart is described in leading a family business. Whether an advisory board makes sense as a neutral body for deadlocks is examined in advisory boards for mid-sized businesses. What control and transparency can look like in small businesses is shown in corporate governance for small businesses.

The agreement also matters for a later exit. Whoever wants to sell or hand over their share someday benefits from clear rules on valuation and transfer. The guide planning your own exit discusses this.

Conclusion: what should business partners settle early?

The guiding question was which topics business partners should settle early so that their agreement holds in a dispute. The answer covers six topics: roles and involvement, shares and information rights, deadlock decisions, exit and transfer, valuation and buyout, and dispute resolution. Settling these topics while everyone gets along does not prevent most later conflicts, but it makes them solvable.

The theory of incomplete contracts explains why this is enough. No contract foresees everything. Above all, it must therefore settle who decides and by what route when something happens that nobody considered. On splitting the shares, research shows that equal shares are not automatically the fair solution. What matters is an honest conversation about contributions.

A shareholder agreement is not a sign of mistrust. It is the record of a conversation that is easy in good times and impossible in bad ones.