Why do I need a shareholders’ agreement?
When you’re starting up a new company, the sheer number of things to do and to consider can be overwhelming, and may push the need for a shareholders’ agreement to the back of your mind.
Although it is not legally required, if your company has more than one shareholder, then a shareholders’ agreement is one of the most important contracts you can have. It governs how a company is run and defines the rights and obligations of the shareholders. It also helps avoid and resolve disputes as well as creating stability to attract future investors.
Family & friends
If you’re going into business with a friend or family member, then a shareholders’ agreement is highly recommended. You may get on well now and be in accord with your business goals, but our experience has shown that this can and does change. A shareholders’ agreement can also help refocus you on your original goals should any disagreements occur in the future.
Lawbase are experts in the field of business law and are dedicated to giving advice to companies of all types and sizes.
The importance of early set up of a shareholders’ agreement
One of the primary functions of any shareholders’ agreement is that it creates transparency between shareholders, and Lawbase recommends that this is one of the first things you consider when starting up a new business venture. By developing and creating your shareholders’ agreement early on, your company starts off with everyone on the same page.
The drafting process of the shareholders’ agreement is a valuable one as it ensures that everyone has the chance to have their say on shareholders’ rights and responsibilities. It gives you a platform to ensure the way the company is run and the obligations of the shareholders have been given careful consideration.
Early creation of a shareholders’ agreement also creates stability and consistency by giving your company a clear and structured framework to deal with any ‘what if’ scenarios. Many future problems can be avoided during this process.
Top three reasons why you need a shareholders’ agreement
An important function of a shareholders’ agreement is dispute resolution. Unfortunately, disagreements between shareholders are common and many companies underestimate the potentially devastating impact of disputes. When a company should be focussed on advancing its own objectives, disputes are an unhelpful and damaging side-line. A shareholders’ agreement is essential because the transparency it provides can help prevent clashes occurring in the first place.
If a dispute between shareholders does occur, then your shareholders’ agreement provides a clear process for resolving the issue and can help prevent the need for expensive legal action.
A shareholders’ agreement is tailored to shareholders’ interests
One aspect of shareholders’ agreement often overlooked is that it gives you greater flexibility. In order to cut costs, some companies opt for cheaper options of standard articles of association, but these don’t make provision for your company’s unique needs. Together with the other shareholders, you can tailor your agreement to suit your company which can be better in the long run.
A shareholders’ agreement is an indicator of business stability
When investigating a business investment, one thing investors look for is stability, and a shareholders’ agreement provides evidence of that. Potential investors can be assured that your company has worked through a robust process of anticipating potential issues in the creation of your agreement.
Creating a shareholders’ agreement
Taking the time to develop a shareholders’ agreement when your company is being formed is a process which will greatly benefit your company and set you up the future. Lawbase recommends you do your due diligence, gather examples of shareholders’ agreements from other businesses, and have the conversations about what’s important for your company.
For further information about putting together a shareholders’ agreement, contact the team at Lawbase. We have experienced business lawyers who can give you the best advice on how to create this essential agreement.