Shareholders Agreements
What is a Shareholders Agreement and why does my company need one?
The short answer is that if you are the sole shareholder of your company then you don’t. A shareholders agreement becomes relevant when there is more than one owner.
A shareholder’s agreement is a contract between the owners of a company designed to document each owners’ rights, responsibilities, and expectations relating to how the company will operate. While a shareholder’s agreement is not a legal requirement, it is a crucial document for any company with multiple shareholders. Essentially it is as a roadmap for the business, preventing misunderstandings and conflicts that can arise among shareholders.
One of the primary functions of a shareholder’s agreement is to protect the interests of each shareholder. A well written Shareholders Agreement clearly defines the rights and obligations of every shareholder, ensuring transparency and fairness.
Key provisions of a shareholder’s agreement:
Share transfer restrictions: This outlines how shares can be transferred, preventing unwanted new shareholders from joining the company.
Pre-emption rights: These give existing shareholders the first right to purchase shares if another shareholder wants to sell.
Dividends and profit sharing: The agreement specifies how profits will be distributed among shareholders.
Decision-making: It outlines how major decisions will be made, such as appointing directors, raising capital, or selling the company.
Dispute resolution: The agreement includes procedures for resolving disagreements between shareholders, such as mediation or arbitration.
A well-drafted shareholders agreement can significantly reduce the risk of disputes among shareholders. By clearly outlining each party's role and expectations, it minimises misunderstandings and disagreements. Moreover, it provides a framework for resolving conflicts amicably, preventing costly and time-consuming legal battles.
Beyond protecting shareholder interests and preventing disputes, a shareholders' agreement can also streamline business operations. It can outline how the company will be managed, including the roles and responsibilities of directors. Additionally, it can address issues such as intellectual property rights, confidentiality, and competition restrictions.
A shareholders agreement should also include provisions for the event that a shareholder wants to leave the company. It can outline how shares will be valued, repurchased, or transferred, ensuring a smooth exit process for the departing shareholder and the remaining shareholders.
A shareholders' agreement is an indispensable tool for any company with multiple shareholders. It provides a solid foundation for the business by protecting shareholder interests, preventing disputes, facilitating operations, and planning for the future. While drafting such an agreement might seem time-consuming and expensive, it is a worthwhile investment that can save the company significant time, money, and stress in the long run.
Turner Hopkins has the expertise to assist you with all of your company needs. Our experts can also help you with your personal asset structuring to help you get your business on track and keep it that way. If you are a shareholder in a company that does not have a shareholders’ agreement or are considering purchasing shares in a company and need to understand your obligations in respect to the shareholders agreement talk to one of our business experts today.
Authored by Kate Chivers.
The Team - Turner Hopkins