Shareholders’ Agreements – Does everyone know their Responsibilities and does everyone have the same Expectations

If you operate a business with others through a company structure and you and your fellow shareholders are never going to argue then you don’t need a shareholders’ agreement.

For most of us however putting a shareholders’ agreement in place when everyone is on the same page and when the shareholders are in agreement is a prudent approach to managing your shareholder relationship.

Often the company’s constitution isn’t enough in providing a mechanism for dispute resolution, shareholder exit and valuation so a shareholders’ agreement is the document which can record the shareholders’ expectations and responsibilities in these circumstances.

Shareholders’ agreements can be as simple or as complex as required but as a minimum should include:-

1. How decisions are to be made – are some decisions to be made by the directors and others by the shareholders, and if so what percentages of votes are required for a decision to be accepted.
2. Funding exit – often shareholders ensure the company takes out insurance on the life of each shareholder so that in the event of death these funds are available to be used by the surviving shareholders to buy-back the exiting shareholder’s shares.
3. Transferring shares – a shareholder wishes to exit the company and needs to sell their shares. Most continuing shareholders will not want to do business with someone they don’t know or at least wish to have the option to purchase the exiting shareholder’s shares before the shares are sold to a third party.
4. Dispute resolution – dispute resolution clauses often involve an external adviser or formal mediation. These clauses at the very least provide an avenue for the parties to resolve their disputes in more cost effective manners before a party institutes expensive litigation proceedings.
5. How the shares are to be valued – how is the company to be valued and what price is a shareholder to be paid when they exit the company should be prescribed in the shareholders’ agreement. Independent valuations are often expensive and can be avoided if the shareholders’ understand how the company is to be valued and agree on the process for valuation before a dispute arises.

 Working with us to develop and agree on the terms of a shareholders agreement is instructive and productive because it encourages the shareholders to work together and consider issues that may not have been considered until a dispute arises.

If you would like any further information on shareholders’ agreements (or partnership agreements) please contact us.