Blog

Many companies start out by a group of friends, relatives and/or work colleagues getting together to attempt to build a business.  In the hard work and euphoria of getting the business off the ground many companies forget to document the relationships between the parties in a Shareholders Agreement.

A Shareholders Agreement allows the parties to the agreement to document the process for a range of issues relating to the operation of the company.  All parties then know what will happen in certain circumstances and this assists in ensuring that the company is run as shareholders have agreed in advance.

In my corporate advisory and valuation work with smaller and mid sized private companies, I have seen far too many examples of problems subsequently emerging that could have easily been dealt with by an appropriate shareholders agreement.  The breakdown of a business relationship can be very stressful and by simply having a Shareholder’s Agreement, you may save a lot time and stress and avoid going to court to resolve issues.

Naturally each Shareholders Agreement will be different depending on the situation, the nature, stage and size of the business and the objectives of the shareholders.

Make sure that the solicitor you use for your agreement has a wealth of experience in drafting such agreements.  Again there are too many poorly drafted agreements out there.  Your business is too important not to invest the money in getting the right agreement.

The best time to have an agreement drafted is at the establishment of the business and the second best time is now!  It is always easier to get an agreement in place whilst everyone is in agreement.

The following is a guide to typical issues covered by a shareholders agreement

• Parties to the agreement
• Initial shareholding – vesting of shares over time
• Intellectual property ownership
• Future fund raising processes
• Composition of the board – appointment and removal of directors
• Matters that require either unanimous or a super majority vote – salaries, dividends, major capital expenditure, borrowings, annual plans and change of business
• Reporting – to directors and shareholders, access to records
• Sale of shares – pre emptive right process, tag along rights
• Ceasing employment – forced sale of shares, determination of price, insurance
• Confidentiality
• Restraint of trade
• Dispute resolution
• Termination of agreement

I encourage my clients to periodically review the shareholders agreement to determine if it is achieving its objectives, it suits the current operation or is overly restrictive.