When starting a business, you want to make sure that all the essential terms of management and sale are settled at the start so that uncertain times are quickly resolved. Then, you and your shareholders can focus on ensuring that the business is a success. These terms should be outlined at the start in a clear and comprehensive shareholders agreement.
A shareholders agreement is a contractual agreement between a company’s shareholders outlining how the company will be run. After signing this contract, the terms are to be complied with for as long as the contracting parties are all shareholders. The importance of a shareholders agreement is to protect investors’ investments and establish a fair relationship between shareholders to avoid future dispute or legal action.
What should be included in a shareholders agreement?
An adequate shareholder agreement will set out the expectations and procedural requirements of the business. An effective agreement could:
- Set out the shareholders’ rights and obligations;
- Describe how the company will operate including appointing and removing directors, making large purchases, and financing the company;
- Outline how the sale of shares will be carried out;
- Explain how important decisions will be made, and who will be involved in making such decisions;
- Dispute resolution procedures.
Risks of not having a shareholders agreement
The importance of companies having a shareholder agreement is well known to lawyers, while the perils of lacking such an agreement are equally known. It is normal for disagreements to arise between shareholders, but without a shareholders agreement it will be uncertain how or who should resolve such disagreements. A shareholders agreement should outlined who will be involved in passing key decisions and how many shareholders make up a majority.
Minority shareholders could automatically be left with little control if levels of control are not specified in a shareholders agreement, leading to a disparity between the amount of influence held by majority shareholders and minority shareholders.
It is not unusual for plans not to work out exactly as imagined and if a business is unlikely to succeed, without a shareholders agreement there will be no exit strategy agreed on, leading to litigation which is time consuming and expensive.
Facebook is a prime example of how not having a shareholders agreement can damage your reputation and your relationship with your co-founders. Upon Facebook’s conception, Mark Zuckerberg and his co-founders, Dustin Moscowitz and Eduardo Saverin, failed to create a shareholders agreement which led to an eventual dispute in which Saverin attempted to resist Zuckerberg’s attempt to dilute Saverin’s shares in the company. This was a highly publicised case and risked damaging Facebook’s reputation and Zuckerberg’s relationship with a longtime friend and colleague.
When should a shareholders agreement be made?
This legal document should be one of the first contracts signed by shareholders of a new company. At the start, shareholders should possess the same vision and expectations for the company, and reaching a decision on the procedural requirements and stakes in the company will demonstrate whether shareholders are likely to agree on later decisions, thus exposing the weaknesses and strengths of your future colleagues. If differences of opinion are too strong at this stage to come to a decision, this will expose future problems that could arise during this working relationship.
If you choose to postpone making a shareholders agreement, shareholders’ expectations towards the business may have developed, making it more difficult to reach a decision on the terms that should be included in the contract.
Clearly, a shareholders agreement is necessary to ensure that disagreements are kept to a minimum. If you are starting out your business, a shareholders agreement is one of the first documents that should be settled. Get in touch with Linkilaw to create a clear and effective shareholders agreement.