So why have a Shareholders Agreement?
Imagine that you and your friends came together to start the business of your dreams. Years later, the company grew profitably and expanded. At this point, you and the other owners could not agree on the future direction of the company, so you decided to exit the business.
Unfortunately, this led to more disagreements and ultimately resulted in a lengthy and costly litigation.
Having a shareholders agreement could have prevented such situation.
A shareholders agreement is a contract between the owners of the company providing protection, clarity and certainty around the shareholders’ rights and responsibilities.
Specifically, in the following ways:
1. A shareholders agreement protects all parties when disputes or other situations arise
Shareholders often engage in difficult conversations when the business is either doing well or badly, or when a shareholder wants to sell or exit. It could get contentious when shareholders do not have a written agreement to refer to. There is also the difficult circumstance of an owner dying or losing capacity at which point their spouse often ends up in control of their affairs who won’t necessarily know any of the deals and ‘handshakes’ that you have made together in the past.
A shareholders agreement is that point of reference in case something goes wrong or if it goes well, it anticipates the difficult road ahead and protects all shareholders’ interests. It is one of the most important documents when you start a business but often the least understood. Most companies that have a shareholders agreement do so with a cheap template and far too little thought.
2. A shareholders’ agreement allows the parties to create their own bespoke legal document
In the above scenario, the shareholders would now be subject to broad legal principles and the uncertainties of a court litigation. To avoid this, a shareholders agreement allows the parties flexibility to negotiate and agree on a set of responses to future events based on their needs. This is not a one size fits all, we go through each of the potential scenarios that will apply to your unique business venture and try to come up with a flexible, workable document that allows you some certainty around future events.
3. A shareholders agreement defines the functions, rights, and obligations of each party
When disputes arise, a shareholders agreement is like an insurance policy as it defines each party’s roles and responsibilities and protects their interests. When you are all working in the business this will help define the remuneration and responsibilities of each of the working parties. It will also look to the future and what will occur if one or more of the parties cease working in the business.
4. A shareholders agreement is only accessible and amendable by the shareholders
A shareholders agreement is exclusively for the use and reference of its parties, and not a public document so you don’t have to worry about prying eyes being able to see the inner workings of the company. Once created by the shareholders it is only amendable by the shareholders based on the terms of the agreement. Usually it is locked so it is unable to be changed without either a special majority or unanimous approval depending on the size of your company.
5. A shareholders agreement saves you from expensive costs of potential disputes
The parties in the above scenario could have saved themselves thousands of dollars, time and even their relationship, if at the outset, they had explicitly agreed on the following clauses in a shareholders’ agreement:
- Management structure
- Buying and selling of shares
- Share transfer procedures
- Dividend policy
- Exit strategies
- Restraint of trade
- Rights and obligations
- Reporting requirements
- Policies and procedures
- Dispute resolution
6. A shareholders’ agreement presents a healthy branding for the business
From a third-party perspective, especially when raising finance or dealing with banks, having a shareholder agreement indicates the stability of the business.
If your business needs a shareholders’ agreement, our experienced team can go through the process with you and our friendly legal partners will draft the necessary provisions.