If you have set up a company, or you are thinking about doing so, you may have heard about a shareholders’ agreement. But what exactly is this, and do you need one? Here’s our guide to what you need to know.
Overview of a Shareholders’ Agreement
A shareholders’ agreement is a formal agreement between the shareholders of a company. It can be between all of the shareholders, or some of them. The aim is to protect the investments of the shareholders and to set down how the company should be run.
When you set up a company, perhaps with a friend or a family member, you want to assume that nothing will go wrong. After all, you trust your partner, so there’s nothing to worry about.
But there are pros and cons involved in setting up a business with someone you know. Things can and do go wrong – and this can cause all sorts of problems down the road, even ending up in legal disputes.
This is why a shareholders’ agreement makes a lot of sense. They are not a legal requirement, and many shareholders will not bother with one in order to save money. But they can save you a lot of hassle months or years later.
Purpose of a Shareholders’ Agreement
Essentially, a shareholders’ agreement helps to protect your business and your own investment. It sets down the obligations of the shareholders and their rights, and it regulates how shares are sold. It also sets down how the company will be run and states how important decisions will be made.
Why Have a Shareholders’ Agreement?
There are many reasons to put a shareholders’ agreement in place. For example, a few years down the road, someone may want to sell their shares, and the agreement could include a provision that allows them to sell when they want to.
As a majority shareholder, you may want to stop minority shareholders doing certain things like passing information to competitors, and the agreement can cover this too.
A minority shareholder could transfer their shares in the future, even to a competitor. You can include rules about this in the shareholders’ agreement to prevent it from happening.
Minority shareholders may not have much say over how the company is run. A shareholders’ agreement may make it clear that all shareholders must approve decisions, such as the appointment of a director.
You can also use the agreement to protect your stake in the company so it is not diluted. And you may want to include details about how disputes should be settled, such as whether you should bring in a mediator.
How to Put an Agreement in Place
Ideally, you should arrange your shareholders’ agreement when the company is formed and you issue your first shares.
You may be very busy and have other priorities, but don’t put it off. The other shareholders may change their opinions later on and be less willing to get an agreement in place, so it’s always worth doing it early.
Make Your Business Relationship Formal
A shareholders’ agreement should be seen as essential when you form a company. It is a way to formalise the relationship from the outset, even if you are in partnership with your best friend or a family member.
People change, their ideas change, their lives change. If there are two or more people who have a joint interest, get the rules laid down at the start and avoid potentially serious problems later on.
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