A shareholders’ agreement is an important and integral part of any company for one reason: because things change in business. Although you might start dealing together with the best of intentions, and think that you agree on every point, in a successful and long-running business there will always be unanticipated decisions to be made. And when the time comes to make them, a simple shareholders’ agreement can remind all parties of the basis on which the business was started, and clear up any disagreements by referring back to the original intentions of the shareholders as they chose to write them out.
The beauty of a custom-made shareholders’ agreement is its versatility. Businesspeople can choose the terms which they want to work under, and can have a lawyer write out these terms for future reference. After all, the company belongs to the shareholders and should be run strictly on their guidance. The agreement allows shareholders to establish when first starting a business, or when first formalising their partnership:
- If shares are to be sold to third parties (most commonly investors) in the future, and if so, at what price
- Which decisions are to be voted on by the shareholders, and which can be decided on by a veto (i.e., every shareholder has to agree)
- How the company directors are to be appointed, removed and paid. The process by which shareholders will receive their monetary dividends. The financing of the company
- Agreements for long-term eventualities, such as a shareholder becoming mentally ill, dying or being declared bankrupt
- The degree of involvement which shareholders retain with the company, and what happens if a shareholder ceases to do business within the company while still retaining shares
These are important decisions, both in the respect of business transparency and in protection. A shareholders’ agreement should prevent serious disagreements arising between shareholders, as these are very damaging to the business: you want everyone involved in the company to be focussed on making money for the business, not on fighting among themselves.
Shareholders’ agreements should also focus on protection; although you will probably trust shareholders when they come into the company (otherwise you wouldn’t have agreed to do business together), it’s important to remember that that trust may be tested or broken. Although some people think that if shareholders are close in their personal lives, they don’t need the legal formalities associated with a shareholders’ agreement, they could not be more wrong.
It’s true that if a shareholder is a ‘silent partner’ or investor, not someone known to the original business owners, s/he will not feel any particular loyalty to the company at the outset. That’s why it’s important to put in place, within the shareholders’ agreement, a degree of control for the active members so that business will not be dictated by an investor’s priorities, rather than the company’s.
However, things can get even uglier if there are fights between shareholders who are close on a personal level, and/ or are both involved in the day-to-day running of the business. A good shareholders’ agreement should prevent one party from defecting from the company and starting a competing business, for example, or from taking trade secrets or client lists if they leave.
No-one likes to think about disagreements at the outset of the business, but for peace of mind it is important to have a watertight shareholders’ agreement drawn up. Hopefully you’ll never have to use it: but it’s important to know that it’s there.