Do I really need a shareholders' agreement?
Spoiler alert: YES! It’s kind of like a pre-nup but for business, protects you if things go wrong. It’s not mandatory by law, but highly recommended (again, like a pre-nup, or insurance).
When starting a business, shareholders typically get along well and can’t foresee any issues arising. However, as the business grows, relationships and priorities often evolve (and can diverge). Sounding more and more like a marriage huh! This makes a shareholders’ agreement invaluable for protecting all parties. Here’s why:
Outlines Rights and Responsibilities
A shareholders’ agreement details the rights, roles, and responsibilities of the shareholders in the company. This includes matters like how the company is run day-to-day, financial matters, management duties, voting procedures, and profit distributions. Setting these out upfront prevents confusion and/or disputes later on.
Defines the Decision Making Process
With a shareholders' agreement in place, major decisions like electing directors, authorising new share issues, or approving a merger have a clear process defined. This facilitates smooth and organised decision making as the company's needs change.
Avoids Disagreements on Exit Strategies
Whether planning for retirement, death, or other contingencies, shareholders’ agreements spell out how shares can be sold or transferred. They may include rights of first refusal, valuation procedures, and buy-sell clauses. This minimises disputes when a founder needs to exit (voluntarily or not).
Protects in Case of Disputes
Despite best intentions, shareholders may encounter irreconcilable differences that lead to deadlock. A detailed agreement provides a roadmap for resolving disputes through mediation, arbitration, or shotgun clauses. This can save the business.
Establishes Ground Rules Up Front
By addressing major issues before operations commence, all involved can agree to fair terms and avoid contentious negotiations down the line. Setting expectations early fosters trust.
A shareholders’ agreement upfront can prevent fractured relationships, power struggles, and protectionism as a business scales. The process clarifies each person's role and priorities for the company's greatest benefit. Don't wait until problems arise - a shareholder's agreement now can save your business later and will be a lot cheaper doing it now than trying to resolve matters when the shareholders are already in dispute.
