Do I Really Need A Shareholders Agreement?
Shareholder disputes can be costly. Learn about the many benefits of a shareholders’ agreement for small business owners.
The absence of Shareholders’ Agreements among SMEs is a huge stumbling block that often results in costly and time-sapping disputes between the business owners. If unresolved, it may lead to the eventual breakup of a thriving business. The lack of Shareholders’ Agreements also hinders the growth of companies as investors shun uncertainty.
What Is A Shareholders’ Agreement?
A Shareholders’ Agreement is an agreement between the shareholders of a company.
The Shareholders’ Agreements are crucial because it helps define the relationship between the shareholders and helps to ensure that everyone is
on the same page regarding the running of the company.
This document can also help clarify how decisions are made and how shares in the company must be dealt with.
If you are a shareholder in a company, it is crucial to have a Shareholders’ Agreement in place.
Benefits Of A Shareholders’ Agreement
For the benefits they provide, the Shareholders’ Agreements is an extraordinarily cheap and yet effective way to minimise disputes between owners. The common uses of a Shareholders Agreement include:
1. Provision of Clear Structure – When starting a company, it is essential to have a clear structure. This can be done through a Shareholders’ Agreement. This document would outline the structure of the company, how it is financed, who are the members of the Board, how the company is to be managed, and any other relevant details. Shareholders’ Agreements can help prevent shareholder disagreements and ensure the company runs smoothly.
2. Minimising Uncertainty – For any business with multiple shareholders, a Shareholders’ Agreement can help minimise the uncertainty that can come with the death, disability or retirement of a shareholder. A properly drafted Shareholders’ Agreement would provide a proper mechanism for transferring shares in the business. This helps keep the company running smoothly.
3. Confidentiality – Shareholders may have different business interests, some being more active than others in the company. Confidentiality clauses in Shareholders’ Agreements help protect the company from releasing commercial information to competitors or outsiders.
4. Investor Relationship – When a company looks for funding, it often turns to venture capitalists. These investors are willing to put up money in exchange for a piece of the company. The Shareholders’ Agreement, in such cases, spells out the rights and responsibilities of each party, including those of the management team and the investors. One of the primary purposes of these provisions is to ensure that the rights of venture capitalists are protected. If things don’t go as planned, the investors can vote to remove the management team, sell the company, or take any other necessary action. Having Shareholders’ Agreements in place, the investors and the management team can rest assured that their interests are being looked out for.
If you are considering starting a business with someone, you must have a Shareholders’ Agreement. This will protect you, your business, and your interests should anything go along the way. It is also essential to keep the agreement updated as your business grows and changes, ensuring that it reflects your relationship with your co-shareholders accurately.