The Key Benefits of Shareholder Agreements

Whether you’ve been involved in running businesses for years already, or have only just begun, it is all too easy to fall into the trap of complacency around the business’s legal documents – particularly when you are on amicable terms with other shareholders.

In reality, overlooking or skipping any legal matter when running a business represents a major risk – and particularly when it comes to the shareholders’ agreement.

Still, more than a risk-aversion tactic, creating a shareholders’ agreement with the help of experienced corporate solicitors has some significant benefits for any company. Read more below.

The shareholders’ agreement explains the shareholders’ rights and responsibilities

While, at this point in time, writing down the shareholders’ ‘list of duties’ may seem like overkill, there are any number of reasons this could prove an essential step further down the line.

If it is in writing, it is much harder to dispute. Expectations can be managed, and any issues can be quickly referred back to a clear document detailing each shareholder’s rights and responsibilities – and, of course, the individual’s confirmation that they will adhere to them.

It regulates the sale of company shares

In the future, there is every chance that one of your majority shareholders will be interested in selling their shares to a third-party. There is also every chance that you and other shareholders would prefer to hold a right to first refusal, and a means of restricting who holds shares in the business.

The only way to do this is to implement a strong shareholders’ agreement well in advance, rather than being forced to react to a sudden and significant change in the company’s management.

It explains how the company should be run

They say too many cooks spoil the broth, but this is likely only going to be the case if those cooks did not begin by creating a clear, comprehensive modus operandi.

The shareholders’ agreement offers a similar framework for any business. While the business’s board of directors will call the shots most of the time, there will be times where matters escalate to the level of the shareholders. If they do, it is far better to be prepared.

It helps to protect minority shareholders and keeps things fair

Some matters can be reserved for unanimous consent, meaning that, however much weight any shareholder has, their voice still holds as much power as majority shareholders. They may also offer protections during the sale of majority shares, enabling minority shareholders to join in the deal rather than struggle to find a buyer of their own.

It sets out how important decisions can be made and by whom

Without a pre-determined method for solving issues and coming to big decisions, it would be all too easy for a shareholder’s meeting to spiral into a rather heated debate. You can’t predict when these issues will arise, but you can protect yourself – and, most importantly, the business itself – against them.

It helps to avoid disputes in the future 

In a more general sense, having that shareholders’ agreement tucked away means that it can always be referred back to as and when it is necessary – for that reason alone, creating an agreement represents one of the most important elements of any start-up or fledgling business. You never know when you will need the support of a legally binding document – but you can be sure that you will need it eventually.