Shareholders’ Agreements – a Pre-nup for Business

A valuable investment to safeguard the longevity and success of any business with more than one owner.

We’ve seen it all too often before – some friends have a cracking business idea so they quit their day jobs to devote lots of time and effort into establishing a new, jointly owned business. They think up a catchy business name, create a fabulous website and have boxes of glossy marketing material at the ready. Their enthusiasm is at an all-time high and they’re all set to market the business and bring in the customers. But they have forgotten something.

They have neglected a vital step in the process of securing the long term success of their business – preparing a shareholders’ agreement.

The purpose of a shareholders’ agreement is to set up a legally-binding roadmap for the owners of a business and to agree in advance how key issues that may arise during the life of any business will be dealt with. Below are just some of the topics a good shareholders’ agreement will cover:

  • The rules on admitting or terminating new directors and shareholders
  • The roles of the Board and key management
  • Voting rights and which decisions require unanimous approval
  • A method for resolving deadlocks and disputes
  • The dividend policy – when they will be paid and when they will be reinvested
  • The terms of making any capital contributions to the business
  • What happens if a shareholder or director becomes incapacitated or dies
  • How shares will be valued if one party wants to exit and who they may be sold to
  • Any restrictions or obligations that should be placed on a director or shareholder who leaves the business (eg non-compete).

For example, if one owner of the business wishes to exit the business and be paid for the sale of his or her shares, a shareholders’ agreement may set out the basis for how those shares will be valued and a process for the exiting shareholder to follow, such as giving the existing owners of the company an option to buy those shares before offering them to a third party.

Considering all the topics a shareholders’ agreement deals with, it really is like the pre-nuptial agreement of the business world as it can avoid or minimise the stress and cost of any disputes – just like a prenuptial agreement before a marriage can minimise the cost of a divorce. That’s why it is best prepared during the start-up phase of a business, when everyone is getting along and minded to cooperate – and also before everyone gets too busy actually running the business to set aside some time to agree on one. That notwithstanding, it is never too late to prepare a shareholders’ agreement.

A good shareholders’ agreement will always have to reflect the particular circumstances of the business and objectives of the owners. It is certainly worth engaging an experienced and practical lawyer to prepare an effective and tailored shareholders’ agreement. After all, it is a valuable investment to safeguard the longevity and success of any business with more than one owner.

For assistance on shareholders’ agreements or any other corporate matters, please contact Victoria Coorey 

A copy of the article can be found here.

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