If you have more than one shareholder in your business, having a written agreement is useful to regulate the relationship between shareholders and to limit conflicts.
Ultimately, every business contract is created to protect the company, its owners and managers, shareholders, workers, and partners. A Shareholder Agreement is no different; however, the key question is who and what this agreement is designed to protect?
There are five key areas each Shareholder Agreement needs to contain. Each of those is further broken down to cover specifics, meaning the document can soon become complex in providing the guidelines to simplify resolution in all kinds of eventualities.
Items in the interest of the shareholders
Many shareholders invest in a business with the sole intention of financial benefit, via dividend payments or by selling the shares in the future after appropriate company growth.
In these instances, the fundamental interests are the value and timing of dividend payments, status and benefits of ongoing employment, the ability to influence business strategy and direction, and the maintenance of relationships with suppliers and customers.
The agreement restricts freedom of action by directors and shareholders, protecting minority shareholders that hold fewer privileges.
Valuing each company is incredibly subjective, especially when considering the intellectual property. As a result, the accountant typically decides the value of company shares based on their opinions of the company accounts.
Decision making roles
Shareholders can be passive or active in running the business. Whichever the action, each role must be set within clear boundaries to define decision-making protocols. The agreement protects minority shareholders against a director-shareholder that would attempt to create change to benefit their personal needs.
Traditionally, majority shareholders held the majority of the power with 1 share = 1 vote. However, that doesn’t always create a fair path through decision-making. In some instances, each shareholder may be entitled to their say or vote. So deciding what constitutes a majority for each situation needs to be laid out in the agreement.
Possible issues necessary to cover
Planning for every eventuality is impossible. Planning for those that are likely, or have shown to be regular occurrences, limits the amount of conflict. This is essential to resolve disputes that hinder the operation of each business and its people.
1. Directors/shareholder conflict
2. Transfer of shares
3. Managing change in business direction
4. Managing changes in shareholder roles
5. Loan management and lender power
6. Managing competitor or partner investments, loans, and subscriptions
7. Shareholder exit procedure
8. Joint venture procedure
9. Former shareholder becoming a competitor provision
Thinking about drafting a Shareholders’ Agreement? We always advise that you engage with an experienced legal adviser to ensure your contract is all-inclusive and delivered according to legal requirements.
The above is intended as guidance only and does not substitute legal advice. Please browse our existing Shareholders’ Agreement services or get in touch with the LegalDrop team via our contact page if you need assistance.