Future-Proof Your Company: The Benefits of a Shareholder Agreement
Picture this: you and your business partner are on the cusp of launching the next big thing. You’ve got the idea, the drive, and the capital—but have you secured your partnership with a shareholder’s agreement? Many business owners dive into ventures without one, only to face costly disputes later. Business partnerships have their ups and downs just like any other. Protecting everyone’s interests and ensuring clarity from the outset is not just wise, it’s essential.
Or perhaps you already have a shareholders’ agreement, but it’s a been a while since it was drafted or you are thinking of bringing some new people into the business. If so, it would probably be worthwhile reviewing it.
What Is a Shareholders’ Agreement?
A shareholders’ agreement is a legally binding contract between the shareholders in a company that outlines their rights, responsibilities, and expectations. Unlike a company’s constitution, this document addresses the specific relationship between the shareholders and enables them to agree to manage their business on whatever terms they choose.
What goes into a Shareholders’ Agreement?
Roles and Responsibilities: Clearly defining the roles and responsibilities of shareholders, and any directors acting on their behalf, avoids misunderstandings. For instance, who will make major decisions, and what constitutes a “major decision”? Who gets to be a director? What level of expenditure can one party authorise by themself? Can one person employ new people (for example, a family member) without the consent of the others? Agreeing these things at the outset can save heartache down the road.
Voting Rights and Decision-Making: Not all shareholders are equal—some may hold more shares or different types of shares. The agreement should outline how decisions will be made, including whether unanimity is required for certain issues.
Preserving the rights of smaller shareholders: Without a shareholders’ agreement, minority shareholders may be at risk of having their holding diluted without their consent, or exclusion from the management of the business. Without an agreement at the outset which makes clear what their entitlements are, these issues can develop into very expensive litigation.
Dispute Resolution Mechanisms: Disagreements are inevitable in business, but they don’t have to disrupt operations. A robust dispute resolution process—such as mediation, arbitration, or a buyout clause—should be included. A lawyer can draft mechanisms tailored to your specific circumstances, ensuring fairness.
Exit Strategies: What happens if a shareholder wants to leave, or a good offer is received for the business that some shareholders want to accept but others don’t? An agreement will usually address buyout options, valuation methods, and restrictions on selling shares to outsiders.
Profit Distribution: Define how profits will be distributed among shareholders. Will dividends be paid out regularly, or reinvested into the business? If everyone knows where they stand at the outset, there are far fewer grounds for complaint later. If there is a dispute then a definitive answer about who is right will generally be a lot easier to find.
Restraints on trade: Your former partner tells you that they want to leave; you buy them out for a fair value and they then set up in business down the road and start contacting all of your customers. Shareholders’ agreements usually contain restraints which should prevent this behaviour or at least give you very clear legal rights if it does happen. They can also be used to permit or restrict the partners’ rights to work ‘on the side,’ depending on your business needs.
In a nutshell, what are the key benefits?
Promoting stability and transparency in your business.
Reducing the likelihood of disputes or, if they do occur, making it much easier to resolve them.
Ensuring fairness and protection of minority shareholders.
Protection of the business’s customer base and goodwill.
Demonstrating to investors and lenders that the business is professionally managed and legally sound.
Take the Next Step
Don’t let a lack of preparation jeopardise your business relationships or success. Whether you’re starting a new venture or revisiting an existing arrangement, a well-drafted shareholders’ agreement is your safety net. Contact us today to discuss your needs and let our experienced team craft a tailored solution for your business.