Advivo explains what business owners need to know about Shareholders Agreements

It can be very chaotic when starting a new business, there can be many ideas and opinions that are being shared in a short period of time. However, a shareholder’s agreement should be something that takes priority. While it is not a legal requirement to have one, a shareholder’s agreement will allow the different parties involved to set very clear guidelines on what is expected. Before speaking to a corporate or business advisory firm to get this process started here are some commonly asked questions about shareholder’s agreements:

What Exactly is a Shareholder’s Agreement?

A shareholders agreement “is a separate contract made between the shareholders, relating to the operation of the company” (Lexology). This usually is very similar to what is included in a company’s articles of association but is specific to the desires of the shareholders. A shareholder’s agreement is a private document that allows the parties involved to deal with specific arrangements away from the company’s articles of association. It works in conjunction with the articles; however, it gives additional protection to shareholders.

What Can Be in a Shareholder’s Agreement?

A shareholder’s agreement can contain specifics about what is expected of every shareholder. Some common terms include; who the chairman of the board is, the right for a shareholder to sit on the board, processes to be followed in the event of incapacity or death, if consent is needed by specific shareholders before the company takes certain actions. The terms should be set by each shareholder, as priorities may vary by things such as number of shares or position on board. It is also important that the agreement restrict the power of directors where necessary and protect the shareholders against the actions of other shareholders.

Why is a Shareholder’s Agreement Important?

First and foremost, a shareholder’s agreement is created to protect all parties involved. When situations or disputes arise, it is very easy to refer to the agreement to settle disagreements. The agreement should have specific instructions to resolve disputes and make it clear how decisions are to be made. Additionally, all shareholders are protected in the agreement, no matter the number of shares they hold. The terms they set should protect those shares as well as their position on the board. It also prevents situations where circumstances for one shareholder can affect other shareholders or the company.

A shareholder’s agreement should be created when starting a business. It is vital that all parties involved are protected and have a space to set guidelines and restrictions. Each shareholder is different; therefore, it is crucial that each agreement is specific to them. Most importantly, a shareholder’s agreement is an insurance policy, which will protect all interests as the business grows.

If you think your business needs a shareholder’s agreement, contact our corporate and business advisory team here at Advivo.