What is a Shareholders’ Agreement?
A shareholders’ agreement is an agreement between company members that sets out their rights and responsibilities as shareholders. These agreements may cover the distribution of shares in the event of death or other events, voting rights and buy-back provisions, protection from liability for certain actions, profit allocation, and investment decisions.
Shareholders’ agreements can be created at the time of incorporation but most often will be entered into later to deal with particular circumstances or problems. They are extremely useful tools for business owners and should be considered part of your company’s governance structure.
Why should companies have a shareholder agreements?
- It guides business operations
The principal reason for entering into a shareholders’ agreement is to ensure that the business is operating to an agreed plan or set of rules. It also protects each person’s interest in the company so that there is a clear understanding of everyone’s rights and obligations.
- It protects the business against shareholder disputes
If a dispute arises between members of a company, there will not be an effective dispute resolution mechanism without a shareholders’ agreement. Without an agreed process for resolving disputes, it can become extremely difficult and time-consuming for all parties to get to the bottom of what happened. A shareholders’ agreement can generally resolve the issue fairly and quickly by following the steps outlined in the shareholders’ agreement.
- It protects shareholders from potential personal liability
When you have a business as a shareholder, your assets are at risk of being taken if someone successfully sues the company for damages or other losses. Without a shareholders’ agreement, you are not protected as an individual shareholder, so someone can pursue debts or claims against you personally. However, with a shareholders’ agreement, you can usually exclude yourself from liability for corporate actions and protect your assets.
- It protects the company from potential personal liability
If your company does business with other companies or individuals, these business relations could potentially result in a contract breach or another claim against the company. As an individual company shareholder, you could be exposed to personal liability if someone involved in this contract wants to pursue it through the legal system. However, with a shareholders’ agreement, most of these risks are limited to the company itself.
- It protects the interests of members who may be silent or in absentia
Many businesses require certain actions to be taken at certain times, such as annual general meetings (AGMs), distributions, amendments to company documents, and shareholder resolutions. If these actions are not taken, the company may suffer a loss of value or other damage. It is not always easy for members to ensure that these actions are taken on time, especially if they do not live in the same location or have conflicting work and family commitments. A shareholders’ agreement can be used to ensure that all key decisions are made as agreed by the shareholders and that a specific action will rectify any failures to act.
In summary, a shareholders’ agreement is vital to the operation of a business. Without one, it can be difficult to ensure that all shareholder approvals are obtained and that all critical operations are carried out as agreed by the company’s members.