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Shareholders agreements: A must have for all companies
26 September, 2013 | Smith and Partners
Whether you are starting a company with other people or investing in an existing company, a shareholders agreement is a must have to ensure that your investment is protected.
Human nature dictates that relationships are always to be treated as being unpredictable and misunderstandings about the appropriate course of action are common. A shareholders agreement gives you certainty as to how the business will be run before, during and at the end of business relationship. It also provides what your obligations are and how decisions will be made.
What is a shareholders agreement?
A shareholders agreement is a legally binding contract that outlines:
- How decisions regarding the company will be made
- The obligations of the shareholders to the company
- The obligations of the company to the shareholders
- Clear rules on how to deal with major events such as the death of a shareholder, a shareholder wanting to sell their shares, appointment and removal of directors
- Dispute resolution procedures should a dispute arise
A shareholder agreement is confidential, unlike a constitution. The operative elements will be confidential to the parties, including implementing any trade secrets.
Who should have a shareholders agreement?
Anyone who owns shares in a company with other parties should have a shareholders agreement. A shareholders agreement can even be an invaluable asset as it protects you moving forward.
When should you set up a shareholders agreement?
Ideally you would negotiate a shareholders agreement prior to forming the company. The process of drafting the agreement will give you an excellent idea as to whether or not you will be compatible with your fellow shareholders (business partners).
It will give you insight into the way people operate in a business context and whether or not you could foresee any issues arising out of that operation. It encourages the parties to think about the potential consequences of what they are about to embark upon. What will involvement with this company entail? What is your part to play? What is required by the others? Who would make the key decisions?
If you are already a shareholder in a company with others, it is not too late to set up a shareholders agreement. For an established business, not only does it provide greater clarity and agreement for how the company will be run, but can be useful for developing strategic plans.
Why have a shareholders agreement?
Without a shareholders agreement there is no surety as to how the business will be run. It is particularly dangerous for minor shareholders, as they have little power to influence how decisions are made.
A shareholders agreement will provide clarity should unforeseen or major changes occur which may adversely impact the company, such as the death of a shareholder, the arrival of new investors or the sale of company assets. Rather than leave it to chance and possibly expensive litigation, certainty at the outset would encourage harmonious dealings between the shareholders and the company alike. A shareholders agreement provides a way to act, a way to deal with each other and promotes dispute resolution should a disagreement arise.
A shareholders agreement can also be seen as a sign of a well developed and good governance structure. It is well known that banks, in undertaking their due diligence prior to lending, are supportive of such structures.
