January 19th, 2021
Why your business owner clients need a shareholders’ agreement
When clients set up a company with family or friends, it’s easy to assume that nothing will go wrong. Since they all know and trust each other, it can seem unnecessary to put any formal agreements in place.
In most cases, nothing does go wrong and the business functions healthily. However, even the closest family members or friends can fall out and, when that happens, it can be vital to have an agreement in place.
Having a shareholders’ agreement can be a good way to give peace of mind and ensure that a business runs smoothly despite any internal issues. Read on to find out why your business owner clients should consider a shareholders’ agreement.
A shareholders’ agreement helps to prevent disputes from affecting the running of the business
As the name would suggest, a shareholders’ agreement is an agreement between the shareholders of the company, which sets out agreed matters between them.
The aim of this document is to protect the shareholders’ investment in a company, to govern how the company is run, and to establish a fair relationship between the shareholders.
This agreement should:
- Describe how the business will be run
- Establish the rights and obligations of shareholders
- Define how important business decisions will be made
- Regulate how shares can be transferred
- Provide an element of protection for both minority and majority shareholders.
It is best to have an agreement in place when a company is formed
As a general rule, the best time for your clients to make a shareholders’ agreement is when they first form their company and begin distributing shares. If they have already formed a company, the sooner they create a shareholders’ agreement the better.
Whilst it can be tempting for your client to postpone the creation of an agreement until their business is up and running, it can be easy for them to forget as time passes.
If this happens, the decision to postpone may come back to haunt them if they were to fall out with other shareholders. Without an agreement in place, a disagreement could turn into a protracted and expensive legal dispute.
Having an agreement in place can save your client both time and money when issues arise, as the document can cover issues such as:
- What happens to shares on the death of a shareholder
- Provisions to prevent third parties from acquiring shares
- How shares can be sold.
Whilst your client cannot predict what problems may arise in the future, having a shareholders’ agreement can help to give them some peace of mind by covering the most likely issues.
An agreement can help to prevent many problems from needing legal settlement
Having a shareholders’ agreement can be a good source of stability for your client’s business, ensuring that the company can run smoothly whatever problems they may face.
For a start, even at its most basic level, creating an agreement encourages your client to consider potential issues and make contingency plans. This can help to give them a sense of confidence that their business is resilient enough to overcome problems.
Furthermore, if your client’s business is seeking finance or investment, simply having a shareholders’ agreement in place can give a good first impression to potential investors as it proves that your client is prepared for future issues.
With that in mind, one of the biggest ways that a shareholders’ agreement can help your clients is by providing a dispute resolution procedure in the event of a falling out.
This formal procedure can help defuse issues by helping to clear up misunderstandings between parties as well as helping to resolve disputes quickly to protect the business.
Another way that an agreement can benefit your client is by ensuring protection for shareholders.
For example, the document can give minority shareholders the ability to procure an offer for their shares if they wish to sell. For majority shareholders, the document can contain clauses that force minority shareholders to sell, if a third party wishes to buy all the shares of the company.
A shareholders’ agreement can help your client’s business by detailing clear provisions relating to the management of the company, which can help to provide clarity and consistency for the day-to-day running of the enterprise.
Finally, it can also be useful for helping your client maintain confidentiality about their business. Since shareholders are likely to be involved with the running of the company, they will probably have access to confidential information.
Whilst legally they cannot take unfair advantage of information that they have received in confidence, your clients may not be prepared to rely on this alone.
Putting confidentiality provisions in a shareholders’ agreement is therefore the best way for your client’s business to ensure that shareholders keep sensitive information confidential, giving them one less thing to worry about.
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Having a shareholders’ agreement in place can be invaluable for giving your business owner clients security and peace of mind.