Shareholders’ Agreements: Understanding the ‘Why’.

Shareholders’ Agreements: Understanding the ‘Why’.

We understand that starting a company is difficult, thrilling, and often costly, so we’ll forgive you if you put legal concerns last on your to-do list. Although you may not want to hear it, thinking about the legal concerns that come with having a company can help you in the long run, rather than wishing you had something in place when things go wrong.

What is the nature of a shareholders’ agreement?

A shareholders’ agreement is a private contract between the shareholders of a limited-by-shares corporation. It governs the many facets of company ownership, how the firm is operated, and how the owners are protected on a day-to-day basis. While a shareholders’ agreement isn’t required by law, we highly advise it if you’re going into company with someone else, whether it’s a friend, family member, or investment. Many financing sources need such an agreement as a condition of receiving funds, and we believe that this practice will grow more widespread in the future. What is the significance of shareholder agreements?

The fallout

In the first case, having an agreement in place means you’ve outlined what will happen in the event of a mishap. These situations are difficult to anticipate, especially if you’re starting a business with a close friend. Unfortunately, as the Facebook spat between Mark Zuckerberg and the Winklevoss brothers shown, things may go horribly wrong. Dealing with the ‘divorce’ from the start helps things go more smoothly and cost-effectively, and avoiding disagreement early on reduces the odds of a stalemate forming if relationships do break down.

Decision-making

The majority of firms do not have a 50/50 split; they have minority and majority shareholdings in varying amounts. The agreement may be written in such a manner that minority shareholders are protected from being outvoted or biased, or it can be written in such a way that majority shareholders can act without the assent of all shareholders. It will make decision-making faster and more efficient by describing the process.

Management

The directors, not the shareholders, are in charge of the company’s overall decision-making (who may be the same people). A shareholders’ agreement may hold directors responsible for specific activities and force them to seek shareholder approval for major decisions. It permits shareholders to stand back from the day-to-day operations of the firm while yet allowing the company’s owners to maintain control by providing for scenarios in which they must be consulted.

Dividends

We all want to be compensated for the effort, blood, and tears that go into starting a company. Through mechanisms such as a share option system, shareholdings in a corporation may be connected to financial contributions or investments in the firm, as well as performance. Company earnings may be allocated in a variety of ways, the specifics of which may be spelled out in the shareholders’ agreement.

Confidentiality/Restrictions

Nobody wants their co-founder to go over to their largest rival and steal all of their trade secrets.

It is essential to appropriately safeguard the business, which may be accomplished by imposing limits on the shareholders while they are still involved in the company and for a period of time after they have left. Restrictions on starting up a competing firm might be enforced to safeguard intellectual property rights, trade secrets, suppliers, customers, and workers from being stolen from the company.

In summary, a shareholders’ agreement may be used as a safeguard to protect shareholders since it specifies what will happen if things go wrong, among other things. The agreement may cover a variety of scenarios, including a company’s financing or re-financing, management, dividend policy, and stalemate circumstances. In the absence of a shareholders’ agreement, there is a risk of conflicts and disputes, which might jeopardise the company’s success.