A shareholders’ agreement is a legal arrangement among a company’s shareholders that outlines how the company should be operated and details the shareholders’ rights and obligations.
Do you have a shareholders’ agreement in place? Are you aware of what the benefits of a shareholders’ agreement entail?
Jo Haigh, Chairman and Founder of fds, provides an overview of the importance of such agreements and why they should be implemented.
Why Shareholder Agreements Matter
While shareholders’ agreements are not mandatory, it is definitely worth considering implementing one. The agreement is designed to save any potential future costs, effort, and time managing complex issues. Akin to a pre-nuptial agreement, shareholders put this together when they hold each other in the highest regard.
A shareholder agreement can deal with matters that you likely wish to never have to deal with, but nobody knows how quickly opinions, dynamics, and relationships in business can change. For instance, one item included within the agreement could be a matter regarding assets being sold without your approval. More importantly, it deals with how the shares are dealt with between the shareholders themselves. What if one of you dies? Have a fallout? What if one shareholder wishes to retire? How will those shares be purchased back? While you may not want to ask yourself or your fellow shareholders these questions, it’s crucial to the operation of your company to have an understanding in place in case any of these events occur.
When To Implement a Shareholders’ Agreement
You may be questioning when the shareholders’ agreement should be put into effect. It is better to approach this at the beginning of the relationship, as unfortunately, a court of law will not handle these types of commercial matters. The court will not swing one particular way. Therefore, the only resolution is through expensive dialogue between the parties, as well as (generally) a third party.
Whilst you can implement a shareholder agreement later, although it’s generally recommended to establish one as early as possible. Ideally, this should be created at the formation of the company. Implementing a shareholder agreement later, however, can still provide significant benefits, such as defining ownership and equity distribution, outlining management and decision-making processes, and setting roles and responsibilities. It can also help prevent future disputes and ensure smooth operations by clearly delineating the rights and obligations of shareholders.
The agreement should be regularly reviewed and updated to reflect changes in the business structure and shareholder interests.
fds has a standard shareholder agreement template available, which is completely editable, so you can adjust it to your company’s requirements. We recommend that any agreement be reviewed by your lawyer/legal counsel.