Why is it important to have a shareholder’s agreement?
Imagine, if you will, that you and your friend have just stumbled across a great business idea.
It’s the type of idea that you are both keen to take off your couch and into the boardroom.
But - before you and your friend dive into making your dreams a reality - there’s something that you need to do first.
You need to draw up a Shareholders Agreement to ensure that you are both on the same page, and to address any potential disputes that may arise between you in the future.
In this blog, we explain what a Shareholders Agreement is, what it could include and why it is the perfect way to set your business up for success.
What is a Shareholders Agreement?
A Shareholders Agreement is a binding, bespoke contract between the company’s shareholders (in other words, the people who get to benefit from the company’s earnings or assets).
Generally, this document sets out:
what rights, responsibilities and obligations the company’s shareholders have;
how the company will be structured and managed, as well as the direction it will take;
who will finance the company; and
how any future issues that arise in the company will be managed.
No company’s Shareholders Agreement is identical as entities are run by people with completely different ideas.
What is included in a Shareholders Agreement?
Here are some examples of some key clauses which are commonly included in Shareholders Agreements relate to:
Structure and management of the company
How many directors will the company have? How will decisions be made? How can shareholders elect or remove a company director?
The powers that shareholders will have
What rights and obligations will each director have? For instance, will one director focus on operations and the other one focus on being the face of the business?
Funding for the company
How much will shareholders be required to put into the company? In the case of a start-up, will all of its earnings in the first year of trade be funnelled back into the business?
Purchase and disposal of shares
Say a shareholder becomes insolvent, dies, gets divorced or retires, what will happen to their shares?
Dispute resolution
Imagine that you and your business partner have a 50% each share in the company and you cannot agree on a specific decision that needs to be made. What process will you follow to resolve the impasse between you? Will you need to go to mediation?
This is, by no means, an exhaustive list of what you can include in your company’s Shareholders Agreement. All companies will have different requirements based on their size, directors and so forth.
My business partner and I have a great relationship. Do we really need to waste money on drafting a Shareholders Agreement?
We get it. When you’re starting out and filled to the brim with excitement, it may be hard to imagine a time when you and your business partner will have a dispute.
You may not want to spend the money on a bundle of paper that you believe you will not use and want to use it elsewhere.
But trust us, differences of opinion are inevitable and a Shareholders Agreement will help you manage any internal and external disputes that you have.
Here is why you should consider spending the money on a Shareholders Agreement:
To have security and peace of mind: If you negotiate your Shareholders Agreement from the get-go, you will have a clear roadmap of how to manage any dispute with your business partner. Imagine negotiating a Shareholders Agreement when you are clashing with your business partner? Impossible.
To avoid legal fees in the future: The initial fees associated with drafting a Shareholders Agreement will be nothing compared to the costs of defending a legal dispute. For instance, with no Shareholders Agreement in place, you may leave yourself at the mercy of a judge to make a call on the company you worked so hard to build.[Text Wrapping Break]
To set your business up for success: A Shareholders Agreement is a good way to show financial institutions and potential investors that your company is stable. If you are wanting to grow, expand or even sell your company in the future, this Agreement will show the business world that you actually mean business.
Would it not be cheaper for me to download a Shareholders Agreement from Google?
Yes, it would be. However, be wary of taking the easy option of downloading a Shareholders Agreement template and signing on its dotted line.
While the template might feel like it is ready to use, the issue is that it is not bespoke for your company. This may mean that it is not right to protect your interests and not worth the paper it is written on.
Should I take the plunge?
Drawing up a Shareholders Agreement will allow you to protect your dream business and give you the right to control it.
Given all the money and time you have invested into setting your business up for success, it makes perfect sense.
If you want to get a Shareholders Agreement started and do not know where to begin, get in touch so we can assist you.