A shareholder’s agreement is without a doubt an important foundation for any business relationship, it can help you to protect the future of your start-up (or on-going business) and prevent any currently unforeseen issues between co-owners from impacting on the business success.
If you are starting a business or if you bring a partner into your business, I always advise all my clients that it’s a good idea, and makes business sense to enter into a shareholder’s agreement with the new partner(s).
It is without a doubt one of the most important legal documents that you must have. In this article we look at the benefits of doing so and find out exactly how they work.
What is a shareholder’s agreement?
A shareholder agreement is a legal contract agreed upon by all shareholders, which defines and governs the business relationship and arrangements between all shareholders of the business.
It typically sets out the rights, responsibilities, liabilities and obligations of each shareholder. It also tends to outline how a business is to operate, particularly when being put together for a start-up.
Having this agreement in place to regulate the relationship between shareholders can help to prevent issues and resolve any that do arise later-on, as the legal document outlines the original intended agreement between parties. For friends or family members that go into business together, a shareholder agreement can also prevent any party from exploiting or manipulating the business relationship.
What should a shareholders' agreement include?
Each shareholders' agreement should contain clauses that fit the purpose of the agreement. Typically, they should describe the following:
Who are the shareholders?
Who comprise the board directors and what is each director's role?
What are the limits of an individual director's authority?
What happens when a shareholder passes away, files for personal bankruptcy, resigns etc?
Policies concerning distribution of profit
What happens if a shareholder wants to leave or there is a falling out - are shareholders entitled to be paid for their shares and leave when they wish? Can the majority force a minority shareholder to sell?
What happens to a departing shareholder's shares? How are they valued and paid for?
Many clauses in a shareholders' agreement may make provision for majority agreement while others, while other clauses may require unanimity for important decisions or those that might prejudice a particular shareholder or group of shareholders.
Benefits of a shareholders' agreement
A shareholders' agreement can be good for dispute resolution, while the document can help you to determine whether all investors are on the same page before going into business together. It is very common for entrepreneurs to start up a business with all the optimism in the world, without giving a second thought to the potential risks and problems that they could potentially face further down the line.
By introducing a shareholders' agreement right at the beginning of a business relationship with your investors, you can make sure that all the difficult questions are raised and negotiated rather than swept under the carpet.
When setting up a shareholders' agreement, it is recommended that you appoint the appropriate legal representative, one that has experience in drafting such agreements.
Doing so, you can be safe in the knowledge that your agreement is legally compliant and tailored to your unique business, covering the key issues you might face and outlining what should happen in each scenario.
With a shareholders' agreement in place right at the start of your business journey, all co-owners have the opportunity to gain clarity regarding the direction of the business while it can also allow you to plan and prepare for any problems you could potentially face in the future, and will go a long way in helping to mitigate the effect of any issue you do have to deal with further down the line.
The information above does not constitute a binding offer to give legal, tax or accounting advice. The information provided above is intended solely to provide general guidance only. Professional advice is strongly recommended if you are undertaking a specific transaction or if you need guidance for a specific set of circumstances. Under no circunstances does ASMAA or any of its members assume any responsability for any losses or damages in respect of any information provided on this website, and we disclaim all liability accordingly.
This article was first published in empowerment-gateway.com on 22 January 2015.