Why do I need a shareholders agreement?

Legally you are not required to have a shareholders agreement. However, if you do not have one you are likely to run into trouble and there is a good chance a dispute will occur.

A shareholders agreement is usually formed at the beginning of a new business venture. A shareholder agreement is a binding contractual arrangement between shareholders; it regulates rights and responsibilities such as:

• Share transfer
• Management structure
• Buying and selling shares
• Exit strategies
• Warranties
• Restraint of trade
• Confidentiality
• Appointing directors
• Reporting requirements
• Dividend distribution
• Rights and obligations
• Policies and procedures
• Dispute resolution

A shareholders agreement prevents disputes

Having a shareholder agreement prevents disputes and allows for the smooth functioning of companies and partnerships.  Disputes often arise when shareholders wish to sell or exit, or if the company is doing particularly badly or even particularly well. It doesn’t matter how well you know the person you’re doing business with – conflict is extremely common when you’re doing business with someone.

A shareholders agreement allows for greater flexibility

Having a shareholder agreement provides you with the opportunity to tailor a contract to your needs. Otherwise you will just have to work within broad legal principles which may or may not work to your advantage.

A shareholders agreement is a private agreement

Unlike the constitution of a company, a shareholder agreement does not have to be made public. Also, only people or companies who are parties to the shareholder agreement can change it.

A shareholders agreement can result in smoothing functioning of the company

Because the shareholder agreement can divide management functions and spell out rights/obligations it can have a useful secondary use as a kind of collaborative management tool.

How can a shareholders agreement save costs?

The initial fees in setting-up a shareholder agreement is nothing compared to the costs of disputes or from bad deals which you might fall victim of in the future.

A shareholders agreement shows the business is stable

When third parties know you have a shareholder agreement it really indicates this is a stable business. This applies particularly when applying for credit and dealing with banks.

Where can I get a shareholders agreement?

You should consider meeting with an accountant, lawyer and any other business advisers you rely on when making a shareholder agreement. All parties need to be in consultation and negotiation throughout this process. An experienced business lawyer will be able to provide the best advice on the risks and the best way draft provisions to secure your rights in the agreement.