A shareholders’ agreement will be one of the most important legal documents that you enter into when launching a new business. It is an important foundation for any business relationship; it can help you to protect the future of your start-up and prevent any currently unforeseen issues between co-owners from impacting on its success.
How do shareholder agreements work?
A shareholder agreement is a legal contract agreed upon by all shareholders, which works to govern their business relationship and arrangements.
It typically sets out the rights, responsibilities, liabilities and obligations of each shareholder. It also tends to outline how a business is to operate, particularly when being put together for a start-up.
Having this agreement in place to regulate the relationship between shareholders can help to prevent issues and resolve any that do arise, as the legal document outlines the original intended agreement between parties. For friends who go into business together, a shareholder agreement can also prevent any party from exploiting or manipulating the business relationship.
What should I include in a shareholders’ agreement?
Each shareholders’ agreement should contain clauses that fit the purpose of the agreement. Typically, they will look at the following:
- Who are the shareholders?
- Who comprise the board directors and what is each director’s role?
- What are the limits of an individual director’s authority?
- What happens when a shareholder passes away, files for personal bankruptcy, resigns etc?
- Policies concerning distribution of profit
- What happens if a shareholder wants to leave or there is a falling out – are shareholders entitled to be paid for their shares and leave when they wish? Can the majority force a minority shareholder to sell?
- What happens to a departing shareholder’s shares? How are they valued and paid for?
Many clauses in a shareholders’ agreement provide that taking certain actions require majority agreement, while other clauses may require unanimity for important decisions or those that might prejudice a particular shareholder or group of shareholders.
Benefits of a shareholders’ agreement
A shareholders’ agreement can be good for dispute resolution, while the document can help you to determine whether all investors are on the same page before going into business together.
It is common for entrepreneurs to start up a business with all the optimism in the world, without giving a second thought to the potential risks and problems that they could potentially face further down the line. By introducing a shareholders’ agreement when beginning a business relationship with your investors, you can make sure that all the difficult questions are raised and negotiated rather than swept under the carpet at the outset.
Top tip for drafting up your shareholders’ agreement
When setting up a shareholders’ agreement, it is recommended that you invest in a specialist legal firm to draft up the document on your behalf. By doing so, you can be safe in the knowledge that your agreement is legally compliant and tailored to your business, covering the key issues you might face and outlining what should happen in each scenario.
With a shareholders’ agreement in place right at the start of your business journey, all co-owners have the opportunity to gain clarity regarding the direction of the business while it can also allow you to plan and prepare for any problems you could potentially face, helping to mitigate the effect of any issue you do have to deal with further down the line.
Davis Blank Furniss is a full-service legal firm with a team of solicitors specialising in employment law.
