Views & Analysis from our Experts

Four Reasons Why a Shareholder Agreement is Essential to your Company’s Survival

Although there is no legal requirement to have a formal shareholder agreement, it’s a good idea for any company with more than one shareholder to have one, as it reduces the potential for conflict between shareholders, helping the company run smoothly and profitably. It also outlines shareholders’ rights, privileges and obligations, and includes the foundation of how to set up, manage, and run the company. Here are four other key benefits a well-drafted shareholder agreement provides:

  1. A shareholder agreement outlines decision making considerations e.g., how you will manage the company and how you can appoint the board. By identifying and listing matters that need unanimous approval, minority shareholders will have a say on important issues.
  2. A shareholder agreement prevents shareholder disputes and addresses exit strategies if conflicts arise—and provides a road map for a resolution. A key element of a shareholder agreement is a buy-sell provision, aka a buyout agreement. It is a legally binding contract between shareholders that stipulates the right or obligation of one shareholder to buy the shares of another shareholder when certain events occur.
  3. A shareholder agreement provides the framework for restrictions on the transfer of shares by addressing all possible triggering events—the good, the bad, and the ugly—sale, retirement, death or disability, divorce, termination, or bankruptcy—so that everyone understands what happens in any given scenario. You need to tightly define value or consideration paid when various triggers are met. This provides stability, enabling the company to withstand uncertain times with confidence. Loose definitions or scenarios not covered by the agreement are the source of many shareholder disputes—wasting time, effort, and money.
  4. A shareholder agreement also deals with the financing of the company and addresses how to raise future monies while demonstrating business stability to potential investors and partners.

If you are a business owner with more than one shareholder, make the investment in a well-drafted shareholder agreement. As shareholders will always have disagreements and not always see eye-to-eye, by setting out shareholder expectations you can then focus on what’s important: the profitability of your business.

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