The response is quite often “haven't we already spent enough money and time with professional advisers” or “why is this necessary?”
It can be easy to overlook how important it is to enter into a shareholder's agreement. But they should offer, among other things, an outstanding dispute resolution tool if the parties that are involved end up having a fall out in the future.
In this article, we will be looking at why you should consider a shareholders' agreement as a necessity instead of a luxury. The following are our five best tips:
1. Make sure your concerns are protected within the business relationships
The relationship between a company and the shareholders is regulated by a shareholders' agreement. It also should govern interactions between other shareholders and the board and between the minority and majority shareholders.
Key issues can be explained in a shareholders' agreement that relates to transferring shares, party obligations, and further share allotments. That codifies the business relationship and helps to prevent the manipulation and exploitation of personal friendships in the event that the business begins to deteriorate.
2. Consider having a combined subscription and shareholder agreement
The following is dealt with by a combined agreement:
- Shareholder provisions (that regulate the operations of the company moving forward); and
- Subscription provisions (deals with how investors are investing).
When a combined agreement is used it can help to save additional expenses and time by both of these sets of issues being dealt with at the same time.
3. Keep it private
Numerous companies don't have shareholders' agreements and instead, operational details are included within the articles of association. However, articles of association must be filed which makes their contents publicly available.
Certain information, however, should be kept from the public domain, including:
- how to incentivize managers
- exit strategy
- dividends policy
One of the major benefits that a shareholders' agreement has to offer is that it doesn't have to be filed with Companies House, which means you can keep potentially sensitive information private.
A company might be launched with a great deal of optimism. However, what if:
- An employee shareholder gets sick and must leave the company?
- There is a falling out among the parties?
- A bank stops lending money?
4. Ask difficult questions and address them
These questions and many others, need to be posed to all of the participants. As the shareholders' agreement is negotiated, it offers a great opportunity to ensure that everyone is on the same page prior to going into business with one another.
5. Prepare for exit
Although it might seem strange after having just launched a company, an exit clause should be included. When future plans are included, it forces shareholders to talk about their visions for the future (which are hopefully mutual). You can also resolve any disagreements you might have, which helps to limit conflict in the future.
When a shareholders' agreement is used, the final version of the negotiated agreement will provide clarity for the company's future direction.
Just as importantly, all of the negotiations that lead up to signing will force all of the shareholders to get together to address all of the difficult issues. This will hopefully help to ensure they have the same plans and goals before they take the major step of starting a business together.
When formulating your shareholder’s agreement contact Net Lawman for advice – they could save you a lot of money on your efforts.
