Entering a business venture with partners? A shareholders’ agreement should be at the top of your priority list. Often underestimated, this legal document is crucial for the smooth operation and future security of your business. So often, this key document is put off to another day until one day, the proverbial hits the fan and then you wonder why you didn’t deal with it in the first place.

Shareholder agreements Prevent Disputes Among Co-Owners

In my dual role as a business owner and lawyer, I’ve witnessed firsthand the complexities and toxicity of disputes between co-owners. These conflicts can be detrimental to your business. A shareholders’ agreement is not merely a dispute-avoidance tool; it’s a testament to proactive business planning. This agreement emerges from vital discussions ensuring all business owners are on the same page, thus preventing issues from festering into unmanageable disputes. Shareholder agreements also provide a structured approach to decision-making and outline processes for unforeseen changes, such as shifts in relationships, personal circumstances, or the unfortunate event of a shareholder’s death.

Essential Discussion Points

Consider these key areas:

  1. Contributions: Clearly define each shareholder’s initial and ongoing contributions, be it in terms of capital, expertise, or time. It’s critical to detail these contributions in the shareholders’ agreement, especially regarding the disposition of assets if the company ceases trading due to internal conflicts or a shareholder’s death. Understanding and agreeing upon these contributions helps in maintaining transparency and fairness.
  2. Returns and Rewards: Discuss the expected returns from the business. Are you looking for a steady income or aiming to build a valuable asset for sale? Establish policies on dividends, salaries, and fees, especially if only some owners are actively involved in daily operations.
  3. Decision-making Process: Where does control lie within the company? Is it at the board of directors level, or with the shareholders? Detail the decision-making structure. As the business grows, define roles and responsibilities, and set thresholds for board voting to streamline operations. Clarify, for example, who has the right to appoint directors and which decisions require consensus among all shareholders. This could include dividend decisions, changes in business nature, or new share issuances.
  4. Exit Strategies: Openly discuss personal goals and exit plans. While alignment is ideal, differing objectives are normal. Plan for scenarios like an owner wanting to exit early or situations involving a serious breach.
  5. Share Transfers: In businesses where certain shareholders are key, share transfer restrictions are often necessary. You might want provisions that require shares to be offered to existing shareholders first, ensuring continuity and control within the existing group.
  6. Dealing with a Shareholder’s Death: Consider the implications of a shareholder’s death. While dividend rights might pass to their beneficiaries, control rights should ideally remain with individuals knowledgeable about the business.
  7. Use of Share Classes: To accommodate unequal sharing of profits or voting rights, creating different classes of shares can be a strategic move. This allows for distinct rights between shareholders, reflecting their varied contributions. For instance, ‘A’ shares might carry different rights compared to ‘B’ shares, facilitating a more tailored approach to dividend distribution and voting.

Binding and Non-binding Elements of a Shareholders Agreement

Remember, not everything discussed needs to be legally binding. Some aspects can remain flexible, depending on your business’s stage. However, important agreements should be formalized.

Avoid Templates – Seek Professional Help

Resist the urge to use internet templates for your shareholders’ agreement. Instead, invest in a skilled corporate or commercial solicitor. They bring more than just legal expertise; they guide critical conversations and ensure your agreement is tailored to your specific business needs. They will also explain the options to you and help you make the right decision for your company.

Regular Reviews and Updates

Business dynamics change, and so do personal priorities. If your shareholders’ agreement is over two years old, it’s time for a review. Realign with your partners, update the agreement as needed, and plan for any changes.

In conclusion, a shareholders’ agreement is not just a legal formality; it’s a strategic tool for ensuring the longevity and success of your business partnership. It fosters clear communication, sets expectations, and provides a framework for resolving potential conflicts. By investing time and resources into creating a comprehensive shareholders’ agreement, you protect not only your business but also your relationships with your partners.