What is a Shareholder’s Agreement and Does my Business Need One?
If you are starting a business, it is crucial to recognize that a shareholder’s agreement is one of the key documents which any company with more than one shareholder needs. Although the company’s memorandum of incorporation is the overriding document for a company, a shareholder’s agreement deals with matters that are strictly between shareholders and that are private. A well drafted and comprehensive shareholders agreement can prevent disputes between shareholders and facilitate the smooth running of the company. Below are some key element that any shareholder’s agreement should contain:
- Any restraints of trade or confidentiality provisions which apply to shareholders both while they are shareholders and after they dispose of their shareholding.
- Valuation methods for buying and selling of shares.
- Funding obligations of shareholders. What money must a shareholder contribute to a company, when must this be contributed and what are the terms of the contribution. Finally, what happens if a shareholder can’t contribute?
In an ideal world, key business agreements should be reviewed every year by an attorney to see whether there have been any changes to the law which may impact the agreement. Less regularly than a dentist check up but every bit as essential. Often times, these reviews can be seen as costly or impractical but it is vital to at least revisit the agreement when a new shareholder admitted, when the company is planning a big acquisition or when there are plans for any substantive changes to the company’s structure or operations. In these circumstances, it is good practice for both the company’s memorandum of incorporation and shareholder’s agreement should be reviewed.
The biggest mistake a company can make is to ignore the need for these kinds of safeguards completely. Business owners often think that the standard documentation prepared when a company is registered is enough, but inevitable situations arise which require the resolution of disputes. These kinds of provisions are usually only found in a shareholders agreement. Without these provisions, things can get sticky and hinder the running of even the most successful company.
The importance of investing in a legal professional that understands your business cannot be underestimated. It is entirely possible to download a standard agreement that affords basic protection but in the thrust of business, especially where more than one business owner is involved, there is no such thing as a standard situation. Every business needs an agreement that makes sense given the individual personality of the owners, the goals of the company and ethos of the people that work there. Good legal agreements give your company a voice and provide instruments that protect a business in the context of its industry. A commercially minded attorney will help you think through possible scenarios that may arise pulling from their broad experience.
As the second half of the year fast approaches, it is the perfect moment to take a look at your business documentation and consider whether you need a check-up. If your business could us a legal eye, do not hesitate in contacting RH Attorneys via our website or sending an email to firstname.lastname@example.org.