Why a shareholders’ agreement is the best way to protect your business

Wednesday, December 12th, 2018

A good friend and colleague once told me these three valuable words – DEATHDIVORCEDISPUTE – and nothing can be truer in business.  Let’s look at the 10 reasons you as a shareholder should have an agreement drawn up between you and the other shareholders in your business.

A shareholder agreement isn’t a legal requirement, but I believe it should be part and parcel of the incorporation process as a way of regulating the way business between each shareholder is conducted.

  1. People fall out – it’s as simple as that

Let’s be real, just because you’re in business with your wife, brother or best friend doesn’t mean that each of you will conduct yourself in a manner that is acceptable to each other.  It is difficult to foresee a scene in which you would disagree, however, disagreements can occur and trying to agree the provisions that should apply if you fall out once you have fallen out will make moving forward almost impossible.  Much easier to agree beforehand how things are going to be decided.

  1. Who is going to manage the company?

Normally the running of the company is left to the directors, however, they may or may not also be the shareholders.  If this is the case, then the shareholders may believe that certain decisions should not just solely be at the discretion of the directors and instead require shareholder approval.  Documenting which decisions fall under this will ease the management of the company.

  1. Protecting minority shareholders

An agreement can provide protection for minority shareholders by reserving certain decisions.

  1. Protecting majority shareholders

In much the same vein as protecting the minority shareholders by reserving certain decisions.

  1. Controlling the transfer of shares

If for example, one of the majority shareholders wishes to sell their shares, an agreement that the other shareholders have a “right of first refusal” ensures that the shares are kept within the original structure and not allowing external investors or unknown individuals to muscle in.

  1. Are the shareholders also employees?

Shares are often held by working directors in the company and therefore if they were to resign the remaining shareholders would more than likely want them to sell their shares otherwise, they would still be entitled to dividends which is generated from the remaining shareholders’ hard work.  Having a provision for shares to be sold to the remaining shareholders prevents this.

  1. What happens if a shareholder wants to leave and sets up in direct competition?

Placing restrictions in such circumstances within the shareholders agreement will safeguard the remaining directors.  These restrictions can be stricter than those that may exist in an employment contract and can protect the interests of the company moving forward.

  1. Dispute resolution

What would happen is there was a major dispute between shareholding parties?  At what stage would you appoint an arbitrator?  Documenting this will help solve disputes quicker.

  1. Business stability

Shareholder agreements are important for banks and anyone looking to invest in your company.  It shows that you are forward thinking and have planned and that any disputes would be resolved swiftly.

  1. Varied dividend policies

If shareholders hold different classifications of shares an agreement can set out how dividends are going to be paid.

One reason I decided to write this post is because recently we have had some queries from clients with issues between shareholders and despite us advising to draw up an agreement they didn’t, and the disputes may well jeopardise the future of the companies and the hard work of some of the shareholders will have been all for nothing.

Investing in your business doesn’t always mean buying equipment and machinery, the best investment you can make is protecting the business, yourself and each other before any relationship sours.

If you would like a referral to any of our legal partners, please contact us and we will connect you.


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