A Shareholders Agreement (SA) is something that I strongly encourage all my clients who operate a business (either as a partnership or company) to have. When I first see a client about starting a new business, they are often full of enthusiasm and great intentions however, have not given much thought about what could go wrong.
The breakdown of a business relationship is a very stressful time for owners and by simply having a SA in place, you could save a lot of money on legal costs and stress and avoid Court.
What does the Shareholders Agreement cover?
The primary aim of the Shareholders Agreement is to resolve any potential issues that will arise in the operation of the business.
It will also typically include:
- What happens on the death or total permanent disablement of an owner;
- Conflict of interest;
- Contribution of capital;
- Composition of the board;
- Decision making process and resolutions that require a majority or unanimous consent;
- The roles of the directors;
- The contribution of capital into the business as and when needed;
- Ownership of intellectual property;
- Profit distribution policies;
- Restraints of trade; and
- Dispute resolution.
The Shareholders Agreement, as opposed to your company’s constitution, is more specialised and tailored to your company’s particular purpose, the nature of its business and the aims and wishes of its shareholder’s.
Advantages of a Shareholders Agreement
The main aim of the SA is to bring certainty to the business relationship.
In particular, a Shareholders Agreement will:
- Make the partners think about and address the issues at the right time (earlier rather than later);
- Create confidence between the partners as to the strategic direction of the business; and
- Help avoid expensive disagreements.
Preparing the Shareholders Agreement
Prior to preparing the SA, you should speak with all shareholder’s and get an understanding of what you want to achieve. Then, seek the advice of an experienced solicitor who will be able to explain to you the legal implications and then draft the SA for you.
As you can see, there are many issues to consider and an experienced solicitor can help ensure the Shareholders Agreement is tailored to suit you. It is easy to see why a Shareholders Agreement is an important tool in business planning.
If you have any questions relating to Shareholders Agreements, please do not hesitate to contact me.