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 shareholders 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.
A shareholders’ agreement is that point of reference that anticipates such events and protects all shareholders’ interests throughout a business life.
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.
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.
4. A shareholders’ agreement is only accessible and amendable by the shareholders
A shareholder agreement is exclusively for the use and reference of its parties, and not a public document like a company’s constitution.
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
- Dividend distribution
- 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.