What is a Shareholders Agreement and why do I need one?
A Shareholders Agreement is a binding contract between the shareholders of a business which governs the rights, responsibilities and procedures to be followed in certain situations. It is an additional document to your company’s constitution and is designed to deal with issues that arise during the life of a business by providing a framework for how such issues will be resolved. Ideally, it is best prepared at the start of a venture, when all parties are enthusiastic and committed to the success of the business (and before any problems arise).
We have a Company Constitution, why do we need a Shareholders Agreement as well?
While company constitutions and shareholders agreements both govern shareholders' rights and obligations, they generally cover different topics. One is not a replacement for the other - the two documents work together to provide an expanded level of governance.
The benefits of a Shareholders Agreement
If you own and control 100 per cent of your business every decision is your decision and you can run the business however you choose.
However, if you have business partners who own shares in the company, you either have to unanimously agree on how the business will be run or at least go with the majority vote. If you have rights, obligations, and processes set out in a Shareholders Agreement you have a better chance of being able to resolve differences because there is an agreed plan for how the situation or decision should be handled. It makes running a business with partners far simpler and more straightforward.
It also a reality that, while many business partnerships are happy and successful, some do break down due to competing interests, disagreements on the direction of the business, or changes in personal circumstances. In these situations, it becomes very difficult to objectively work out the best way forward. Your Shareholders Agreement sets out a procedure to follow and all parties know where they stand in terms of their rights and obligations.
What should a Shareholders Agreement cover?
Agreements will generally cover the funding, structure, management and direction of the business.
The content included in the Agreement will differ according to the structure of the business, the types of entities involved and the individual requirements of shareholders and their advisors. We therefore don’t recommend an off-the-shelf solution and advise each party to seek appropriate professional advice independently prior to finalising any documentation.
A shareholders agreement may include provisions to address the following key areas:
- the management and objectives of the business
- how the company will be owned and funded
- how decisions will be made
- confidentiality obligations
- shareholders rights and obligations
- the acquisition and disposal of shares
- how the agreement can be amended in the future
- the dispute resolution process
- exit events such as the retirement or death of a shareholder, mergers or acquisitions or liquidation
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