While setting a company in partnership with your family or friends, there is always a feeling that nothing can go wrong in the future. When there is a trust, you never think of setting up an agreement such as shareholder’s agreement. You may also think that talking about shareholder’s agreement might go wrong with the trust or respect you share with your new business partners.
We can only hope that everything will be good between you and your family members and friends but in case it goes wrong then it might be possible that it could end up with nothing or may lead to friendship breakdown or a legal business dispute. Hence, Shareholder’s agreement has its significance and acts as a safeguard that gives protection to business partners in such problematic scenarios.
If you are going to start a business with others, you need to have a shareholders agreement in place that will boost your confidence about your future relationships with your business partners and protect your investment and business enterprise.
What is a Shareholders Agreement?
A shareholders agreement is an agreement between the shareholders of a company. Its main objective is to safeguard the investment of the shareholders and to establish a fair business relationship between them.
Why is it important to have a shareholders agreement?
A well-drafted shareholders agreement is essential as it makes an understanding between the shareholders of the company and helps in removing the uncertainties that may appear in future due to disagreements. It is not a legal requirement but still, it is recommended that you must have a shareholders agreement in place because of the following important reasons –
Protection to shareholders– A well-drafted shareholders agreement acts as a safeguard and gives protection to the shareholders if in case any dispute arises between them in future. A Shareholders agreement can be an essential tool in managing such disputes to avoid taking any draconian measures such as the dissolution of the company.
Protection to investors– Investors are considered as a big support to the company and therefore it is the responsibility of the company to give them protection. Here, the shareholder’s agreement comes into the picture. Provisions can be created for investors in shareholders agreement to cover what action investors can take if the company doesn’t perform as per their expectations.
Protection to minority shareholders– Shareholders agreement plays an important role in protecting the minority shareholders rights and investment value. In its absence, minority shareholders may force issues that are not in the interest of the minority, resulting in a reduction in the value of the minority shareholder’s interest in the company.
Gives clarity who makes decisions– In most of the scenarios, we have seen that directors are also shareholders and make day to day decisions of the company. Properly drafting the shareholder’s agreement can differentiate their powers of taking decisions – directors are accountable for certain actions whereas for key decisions they need to take the consent of shareholders (particularly in cases where directors are not shareholders). Therefore, enough time should be spent on agreement drafting and deciding that who will be considered as an authority in different scenarios of decision making and provides clarity that which decision will be taken by whom and in which situation or circumstances, shareholders approval is required.
Control the transfer of shares– Shareholders agreement also plays an important role in creating provisions related to prevention of acquisition of shares by unwanted third parties. It means that rights could only be given to owners who are handling the shares from a period or persons working in the company.
Acts as a record of agreement– Shareholders agreement is a record which comprises of what can and what can’t be done as well as prevents you from disputes arising out of a business relationship and even suggest adequate measures for the solution.
Protecting confidentiality– It is a confidential agreement of the company and should not be disclosed to any other person except shareholders. Hence, it is not disclosed publically at companies’ house and should be kept private.
Protecting competition– Restrictive conditions can also include in the shareholder’s agreement to prevent shareholders from setting up rival businesses.
Right to dividends– Shareholders agreement also includes information related to the declaration of dividends – various dividend policies can be created to set up dividends depending upon the different classes of shares.
Requires no on-going administration– Once the shareholder’s agreement is agreed, signed by everyone along with the date, no further work or administration is required.
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