Wednesday 22nd January 2020,
Grm Law Firm

Shareholder Agreements, What to Consider

Shareholder Agreements, What to Consider

It’s easy to assume that setting up a new company with a family member or a friend will go well. You have trust in one another, and you probably aren’t giving a shareholders’ agreement a second thought, but perhaps you should. A shareholders’ agreement isn’t about not trusting each other, it’s about giving each other the respect that you both deserve, in the face of anything that may go wrong; it’s a safety net for both of you.

Hopefully nothing will happen that could negatively affect either of you, but arguments happen, and businesses sometimes don’t take off too well, and you don’t want to end up with nothing. Legal disputes are among the top reason for fights between business owners, and they can potentially lead to the loss of the business. A well written shareholders’ agreement can safeguard all business partners in the event that something bad happens, and can help protect your assets. Shareholders’ agreements allow proper agreements between all parties to be put into place, and even if they’re never relied on, one day, you might be glad that the terms were already in place for you.

What is a shareholders’ agreement?

A shareholders’ agreement is an agreement between the shareholders of a company where the aim of the terms agreed on are to protect the investments of each shareholder, and establish a fair relationship between all parties involved.

The agreement will set out the rights and obligations of each shareholder, regulate how the sale of the company shares will be split, note how the company will be run, elaborate on how important company decisions will be made, and provide protection for shareholders who are the minority of the company. It contains specific and practical rules that relate to the company and the relationship between the parties involved.

What should be included

Depending on whether you are a majority or minority shareholder, your section of the agreement may differ in various levels when compared to other shareholders. The key elements of a shareholders’ agreement, however, remain the same.

To start with, a shareholders’ agreement should include the terms of issuing and transferring shares; this is particularly important, as it will prevent third parties from acquiring shares of the company. The agreement should also provide some protection to any shareholders that hold less than 50% of the shares; for example, they should be included in decisions that affect the company as a whole.

The terms of the agreement should elaborate on how the company will be run while it is in business, including any decisions regarding directors, finances, banking, and again, business decisions. There should also be a section that discusses dividend payments, restrictions on business competition, and how dispute procedures will be carried out.

It is very possible that the terms in the shareholders’ agreement will be discussed in other company documents, like the articles of association, which usually include details relating to the transfer of shares within the company. All documents should echo each other, and all shareholders should be involved in the agreements.

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