When going into business with other people, it is essential to lay down the rules and agree on responsibilities from the outset. A professionally written formal shareholder agreement is a necessity to avoid unnecessary issues later on.
Integra Solicitors have specialists in all aspects of business and commercial law. Our experts can draw up an agreement that will accommodate and protect all relevant parties.
What is a shareholder agreement?
A shareholder agreement is a legal agreement that is between the shareholders of a company (and typically the directors) that outlines the relationship between all parties. It defines how the business will be operated the rights and obligations of each shareholder.
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Key areas covered in a shareholder agreement
Key areas covered in a shareholder agreement
This is a non-exhaustive list, but a shareholder agreement will typically include the following…
- Day to day running of the company
- The business of the company
- Shareholders dividends
- Transferring of shares (whom shareholders may and may not transfer to)
- Voting rights
- Conflict resolutions
- Issuing of new shares
- Restrictions on shareholders
- Appointment and removal of company directors
- Breach of shareholder agreement
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Establishing the expectations and arrangements you have with your shareholders from the outset will minimise the risk of dispute further down the line.
It is essential to be clear from the outset about what the company’s owners want form the company. This will include salary and earnings, what the business does and what direction it is going in. The shareholder agreement will also establish how decisions are made and the exit options of the business owners.
There is also the issue of legacy shares to be decided upon should a shareholder pass away or retire. A shareholder agreement can be set up to protect the majority shareholders or it can be established that minority shareholders still have a say.
Decisions Limbo or Deadlock
When a company is in deadlock, it is usually because there is an equal number of shareholders and shares that carry a vote. If they are on opposing sides during a company dispute, it can lead to a deadlocked decision. When there is no majority vote it can be difficult to resolve the issue in hand and a deadlock can leave the company in a state of limbo making it impossible to move forward.
A shareholders’ agreement will provide a solution should a deadlock situation arise. A deadlock situation usually happens when a simple majority of over 50% cannot be reached on company decisions. Having these agreements in place is of particular importance to ensure that the company can keep moving forward with all crucial business decisions.
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Exiting The Business
There may come a point at which either one of the business owners or shareholders wishes to leave the company for what ever reason. This may sound fairly straightforward, but without a proper agreement in place a multitude of problems can arise.
For example, the shares may now be worth a lot more than they were in the beginning, but the other shareholders can’t afford to buy them. What if that shareholder sells the shares to someone you don’t want to have in your business? You could be left open to a takeover as a result of a shareholder exiting.
Then there is the possibility that the shareholder that wishes to leave, wants to set up in direct competition. Your shareholder agreement should protect you against this scenario.
Also if there is an issue with a shareholder and they need to be removed from the company, it can be very difficult. Without a proper agreement in place, you could find yourself going through a costly and lengthy court case and still be on the losing side.
When starting out in business it is usually done with like-minded individuals who share your vision and with whom you have a good deal of trust.
However, as a business grows and circumstances change, so can the ‘ideal’ of the partners. These differences may lead to disputes if there is no clarity about what happens should certain situations arise. This can ultimately lead to the downfall of the business.
Disputes surrounding misappropriation of funds, allegations of misuse of the company bank account or setting up a competing business are just a few of the issues that can arise as a company grows.
A well drafted, bespoke shareholder agreement can help you to avoid these kind of catastrophic disputes that can lead to a great deal of time, energy and finances being used to resolve the avoidable issue.
To avoid the headache why not contact us today and speak to one of our experts in Shareholder Agreements.
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