If you’re a new business owner or start up, one of the first things you need to do is set up a shareholder’s agreement.
What is a shareholder agreement and why do you need one?
A shareholder agreement is a legally binding contract between the shareholders of a company. It sets out the rules and regulations governing the relationship between the shareholders and the company. Each shareholder’s rights and obligations are outlined too.
Shareholder agreements are important for new businesses or start-ups because they help to avoid disputes between shareholders down the track.
What should you include in a shareholder agreement?
Here is a sample of some key issues to consider when drafting a shareholder’s agreement with your solicitor:
Director and management structure
This section outlines who will serve on the Board of Directors and how decisions will be made. It may also include provisions for adding or removing directors, filling vacant seats, and setting meeting agendas.
Buy-sell provisions
Also known as buyout clauses, these provisions detail what will happen if a shareholder wants to sell their shares or if the company is sold. They can help to protect minority shareholders from being forced out of the business or from being taken advantage of financially.
Financing
This section outlines how the company will be financed, including details on issuing new shares, loans, and other forms of investment. It can also include provisions for repaying debts and distributing profits among shareholders.
Share transfer restrictions
Share transfer restrictions are designed to protect the company from hostile takeovers by preventing shareholders from selling their shares to outside investors without approval.
These items are by no means exhaustive, but they are a good starting point. Consult with your advisor or solicitor to ensure you have all bases covered for your business.
The benefits of having a shareholder agreement
The reasons to have a shareholder’s agreement are numerous, but there are some key points to keep in mind:
- Providing certainty and clarity: A shareholder agreement can help to provide transparency and guidelines regarding the roles and responsibilities of the shareholders.
- Protection for minority shareholders: A shareholder agreement can help to protect minority shareholders from being unfairly exploited by the majority.
- Flexibility: A shareholder agreement can be customised to suit the specific needs of the company and its shareholders. This flexibility can be particularly helpful as the company grows and changes over time.
Overall, a shareholder agreement can be a valuable tool for companies and their shareholders and helps to reduce your businesses overall risk profile.
Tips for negotiating a shareholder agreement
- Make sure you understand the risks involved in owning shares in a company. There are risks to be aware of, including financial risk, legal risk, and reputational risk.
- Ensure you have a clear understanding of the company’s business model and how the shares will be distributed among the shareholders.
- Be clear about what rights and obligations you’re willing to agree to as a shareholder.
Helping you get your agreement right from day one
If you’re a start-up or small business owner, it’s important to have a clear understanding of shareholder agreements and the importance of seeking legal advice. Most importantly, a shareholder’s agreement can help protect your company and its owners in the event of a dispute. At Lakis & Knight, we offer 1-hour, no obligation discovery sessions to help business owners understand their options and get started on the right path. Contact us today to book an appointment.
