If you are in business with someone else, whether it is with a family member, friend or business partner, it is crucial that the rules of this business relationship are documented to protect the business and the interests of all parties.
Sadly, I often see businesses get embroiled in costly disputes in circumstances when a shareholders agreement could have prevented unnecessary legal costs and disruptions. In fact, I will go out on a limb here and say that most successful businesses I deal with all have well drafted shareholders agreements in place.
WHAT IS A SHAREHOLDERS AGREEMENT?
A shareholders agreement covers the key provisions necessary when owning and operating a private company with two or more business owners. It is one of your company’s most important documents as it sets out how the business will run. It should cover a range of matters some of which are set out below.
WHAT DOES A SHAREHOLDERS AGREEMENT COVER?
Your shareholders agreement should cover a number of important issues to best protect the interests of the parties and the business, for example:
The Business Management Structure
A shareholders agreement should include provisions which regulate the company’s directors and management structure. Generally, this will include clauses relating to decision making, the rights of shareholders to appoint or remove directors, voting rights at board meetings and the powers of the managing director.
Transfer of Shares
A shareholders agreement should outline the process involved with the sale of shares. The transfer provisions will set out the rights and obligations of shareholders to buy or sell their shares in certain circumstances, including insolvency, disability, death or retirement. It is recommended that a price or valuation mechanism should be included.
The share transfer provisions are often considered to be the most important provisions in shareholders agreements, particularly for minority shareholders in private companies who otherwise may not be able to dispose of their shares. Likewise, shareholders agreements often restrict share transfers, so all the shareholders have some control over who they are in business with.
Shareholders Rights and Obligations
Shareholders will have certain rights and obligations under their shareholders agreement and it is important that these rights and obligations are fair in the circumstances and each shareholder must fully understand their rights and obligations so that they are carry out what is required of them. For example, certain shareholders may be entitled to appoint a director in the company. If you are not a director, or do not have the right to appoint a director your rights may be limited with respect to receiving company information or making decisions or entering into contracts on behalf of the company.
It doesn’t benefit anyone to go straight to costly litigation as soon as a conflict arises. A dispute resolution clause will typically require a notice of dispute to be issued and then require the parties to explore other options to resolve the dispute (for example by way of informal dispute resolution techniques such as negotiation, mediation or independent expert appraisal). The shareholders agreement should set out the order of these informal disputes resolution options (typically from least formal to most formal) and may also require certain steps to be taken within a particular timeframe to avoid having disputes drag out unnecessarily.
Protecting the Company
Shareholders agreements should contain clauses which protect the business interests of the company. For example, shareholders should be required to disclose conflicts of interest, be prevented from being involved with competing businesses and have restrictions imposed on them in dealing with customers of the company.
A confidentiality clause should be included to cover:
- the information that is agreed to be confidential;
- who the confidential information can be disclosed to;
- requirements when disclosing confidential information (e.g. the recipient may be required to enter into a confidentiality agreement); and
- what happens in the event that the confidentiality provisions are breached by a party.
This clause needs to be considered and drafted carefully. If confidential information is leaked it could have detrimental effects on the business and the shareholders. You will also need to consider your confidential information must continue to be kept confidential after termination of the shareholders agreement.
This is just a tester of what your shareholders agreement should cover and the things you need to watch out for when your shareholders agreement is being prepared. Shareholders agreements are complicated documents that require a unique understanding of your business operations and the individual shareholders concerns in order for them to be drafted correctly FOR YOUR BUSINESS.
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Typical Legal Disclaimer!…
Unfortunately, there is never a ‘one size fits all’ formula to apply. Every situation is unique and it can be tricky to wrap your head around some areas of the law. To ensure you are setting yourself and your business up for success, it is always best to consult a legal professional with expertise in the field.