Why are shareholder agreements important for a growing business?

When starting out on a new business venture, or growing your business, shareholder agreements may not yet be high on your priority list, but what are they and why are they so important?

What is a shareholder agreement?

Shareholder agreements are there to protect the shareholders’ investments as well as establishing rules on the relationship between shareholders and how the company will be run. It is there to prevent the future of the business being jeopardised in the case of a disagreement between shareholders.

What does a shareholder agreement cover?

It can cover a wide variety of aspects of the relationships between shareholders and their individual relationships with the business. Some examples of this are as follows.

Defining the rights and obligations of the shareholders. The agreement will clearly outline each shareholder’s rights, responsibilities and obligations. This includes voting rights, profit distribution and responsibility toward the company. This is very important for outlining everyone’s role and avoiding future conflict.

Protecting your investment. A shareholder agreement can protect your ownership stake in the business. This may be needed if certain situations arise, such as another shareholder wanting to sell their shares, death, incapacity or disagreement. It will give you the means to control what happens to your shares or the company as a whole in such circumstances.

Regulating how, when and whose shares can be sold to. Shareholder agreements can also define what happens to shares and how they are valued should a shareholder want to leave, become incapacitated or pass away. This is important to ensure that all shareholders are on the same page when someone would like to leave the business and guarantee continuity on topics such succession planning, i.e. if shares go to heirs or if there are buy-sell provisions in place.

Giving some protection to minority shareholders. For a minority shareholder, this agreement makes sure that your interests are protected and prevents scenarios where majority shareholders make decisions that would unfairly disadvantage you.

Attracting investors. If you are hoping to attract more investors to your business, a well-drafted shareholder agreement could be the reassurance they need that your business is the perfect candidate. It can indicate you’re committed to protecting the interests of all parties and have clear structures and processes in place.

What happens if shareholders disagree?

If the shareholder agreement is comprehensive, processes for conflict resolution can be added. Without this, disputes can escalate quickly and become costly or damage the business. Ensuring that clear expectations are set out from the beginning will help to prevent conflict and create clear processes for addressing disagreements.

Having a shareholder agreement in place is a proactive way of safeguarding the future of your business and avoiding conflict. It is always useful to seek legal advice on the best way to achieve your goals. The solicitors in the Corporate and Commercial Law team at Fraser Dawbarns have extensive experience in helping to create agreements that protect shareholders. Contact Jenny Ball on  jennyball@fraserdawbarns.com or Aashish Soni on aashishsoni@fraserdawbarns.com today  to discuss your individual requirements.

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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.