What is a Shareholders’ Agreement and Do We Need One For Our Small Company?
When setting up a company with family or friends, it is easy to believe that nothing can go wrong in the future. You might assume that, because you trust one another, you do not need to put in place something like a Shareholders’ Agreement. However, even relationships between family members and best friends can fall apart and, if the worst should happen with the business, you could end up with nothing. Or, you may face the breakdown of a friendship alongside a costly and acrimonious legal dispute related to the business. A well drafted Shareholders’ Agreement can act as a safeguard, prevent costly litigation, and give you and your fellow shareholders more protection against these types of scenarios.
The benefits of having a Shareholders’ Agreement do not end with addressing disagreements among business partners or dealing with unforeseen circumstances. Rather, a Shareholders’ Agreement, first and foremost, lays out the ground rules of the business relationship; it clarifies roles, responsibilities and procedures. Also, should the articles of incorporation permit and should you decide to sell your shares to a third party, a Shareholders’ Agreement can add significant value to your investment as it makes your interest in the business more marketable.
The Shareholders’ Agreement will:
- Set out the shareholders’ rights and obligations;
- Regulate the sale of shares in the company;
- Describe how the company is going to be run;
- Provide an element of protection for minority shareholders and the company; and
- Define how important decisions are to be made.
The key provisions that you should consider including in a Shareholders’ Agreement are those relating to:
- Issuing shares and transferring shares – including provisions to prevent unwanted third parties acquiring shares and how a shareholder can sell shares
- Providing some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders
- Running the company – including appointing, removing and paying directors, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company
- Paying dividends
- Competition restrictions
- Dispute resolution procedures
Shareholders’ Agreements are often thought of as an insurance policy or blueprint of the business relationship. It is important that you communicate to your corporate lawyer all worries and concerns with respect to the business in general and with the business partners in particular, since these agreements must be tailored to suit your specific business.
If you are presented with a Shareholders’ Agreement by another business partner, you should seek the advice of a corporate lawyer before signing. These documents are often lengthy, complex and the legal significance of certain clauses can easily be disguised in what can appear to be simple language.