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The Importance Of A Shareholders Agreement
Author : Glenn Prialde
Submitted : 2012-02-22 14:45:11 Word Count : 4 Popularity: Not Rated
Tags: shareholders agreement, law, legal, business, company formations, a and b shares
Even if the company is owned by two brothers, a mother and daughter, or close friends, every expert lawyer, businessperson and accountant will recommend that you have such a shareholders agreement set up. Ideally, the agreement will be in place before you even start doing business together.
A shareholders agreement is an important and integral part of any company for one reason: because things change in business. Although you might start dealing together with the best of intentions, and think that you agree on every point, in a successful and long-running business there will always be unanticipated decisions to be made. And when the time comes to make them, a simple shareholders agreement can remind all parties of the basis on which the business was started, and clear up any disagreements by referring back to the original intentions of the shareholders as they chose to write them out.
The beauty of a custom-made shareholders agreement is its versatility. Businesspeople can choose the terms which they want to work under, and can have a lawyer write out these terms for future reference. After all, the company belongs to the shareholders and should be run strictly on their guidance. The agreement allows shareholders to establish when first starting a business, or when first formalising their partnership:
- If shares are to be sold to third parties (most commonly investors) in the future, and if so, at what price
- Which decisions are to be voted on by the shareholders, and which can be decided on by a veto (i.e., every shareholder has to agree)
- How the company directors are to be appointed, removed and paid. The process by which shareholders will receive their monetary dividends. The financing of the company
- Agreements for long-term eventualities, such as a shareholder becoming mentally ill, dying or being declared bankrupt
- The degree of involvement which shareholders retain with the company, and what happens if a shareholder ceases to do business within the company while still retaining shares
These are important decisions, both in the respect of business transparency and in protection. A shareholders agreement should prevent serious disagreements arising between shareholders, as these are very damaging to the business: you want everyone involved in the company to be focussed on making money for the business, not on fighting among themselves.
Shareholders agreements should also focus on protection; although you will probably trust shareholders when they come into the company (otherwise you wouldnt have agreed to do business together), its important to remember that that trust may be tested or broken. Although some people think that if shareholders are close in their personal lives, they dont need the legal formalities associated with a shareholders agreement, they could not be more wrong.
Its true that if a shareholder is a silent partner or investor, not someone known to the original business owners, s/he will not feel any particular loyalty to the company at the outset. Thats why its important to put in place, within the shareholders agreement, a degree of control for the active members so that business will not be dictated by an investors priorities, rather than the companys.
However, things can get even uglier if there are fights between shareholders who are close on a personal level, and/ or are both involved in the day-to-day running of the business. A good shareholders agreement should prevent one party from defecting from the company and starting a competing business, for example, or from taking trade secrets or client lists if they leave.
No-one likes to think about disagreements at the outset of the business, but for peace of mind it is important to have a watertight shareholders agreement drawn up. Hopefully youll never have to use it: but its important to know that its there.
Author's Resource Box
Matthew Kemp wrote the above article about shareholders agreements and found the following website useful http://en.wikipedia.org/wiki/Shareholders_agreement
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