Shareholders Agreement - Critical or Not?

A shareholders agreement is perhaps one of the most critical documents that a privately owned company can have.

All business partnerships start out with good intentions.  Each of them will vary in form, but they will all have one thing in common - the ability to go horribly wrong.  In newly formed companies, optimism is high and everyone is getting on.  As a result, shareholders often do not see the need for such an agreement, especially when money may be tight. They consider it to be an unnecessary expense.  However disputes between shareholders do arise, for many different reasons and cannot always be ended simply and amicably.  Such disputes can be extremely disruptive to a business and in circumstances where there is a deadlock can result in bringing the business to a complete standstill through the inability to make decisions.

Shareholders agreements are critical because they provide a method for:

• resolving shareholder disputes. By providing a structure for parties to work within, not only can disputes be resolved quickly and effectively, but conflict can often be prevented before it begins;

• preventing the personal circumstances of a shareholder affecting the company or the other shareholders. If a shareholder were to die then other family members, who may not know much about the business, may take their place. If a shareholder gets divorced then their former spouse may turn up at board meetings and cause problems out of spite. A shareholders agreement can prevent this. Furthermore, without some form of agreement in place, shareholders are free to sell their shares to any third party, which may not be in the best interests of the company;

• defining the powers of the shareholders and creating procedures and limits within which the company can operate. Without some form of agreement in place shareholders are able to enter into contracts and other commitments on behalf of the company without any proper consideration of the effects that they may have, which could spell disaster for the company and the other shareholders.

If you would like any further information on drafting a shareholders' agreement or on reviewing an existing shareholders agreement, then please contact Jennifer Bell on 01254 828300 / 07912 390020 or email: Jennifer@backhouses.co.uk