Why your business needs a shareholders’ agreement

For many businesses, especially start-ups and small enterprises, shareholder agreements are often overlooked.

They’re seen as something only larger companies with complex ownership structures need.

However, the reality is that a well-drafted shareholders’ agreement can benefit businesses of any size as long as there is more than one shareholder.

While it’s not a legal requirement, not having one in place can expose you to unnecessary risks that can be easily avoided.

What is a shareholders’ agreement?

A shareholders’ agreement is a formal arrangement between the shareholders of a company.

It outlines the relationship between the shareholders, the management of the business, and the procedures to follow if issues or disputes arise, ensuring everyone is on the same page.

Key elements of a shareholders’ agreement

Your shareholders’ agreement should cover a range of scenarios that you may not have considered when starting your business.

These are the key areas to focus on:

• Shareholder rights and responsibilities – Clarify who does what in the company, and what decisions require majority approval versus unanimous consent. Decide who can appoint and remove directors and what exit strategies will be accepted.
• Handling of shares – Detail what happens if a shareholder dies, retires, or becomes bankrupt. Who has the right to buy their shares? Will their shares be split equally between the remaining shareholders? This is particularly important in smaller businesses, where the remaining shareholders may not want an outsider coming in unexpectedly.
• Protection of minority shareholders – If your business is not owned equally, it’s important to protect the interests of minority shareholders. The agreement should prevent the majority from making decisions that could unfairly disadvantage the minority.
• Dispute resolution – Disagreements are bound to occur between shareholders at some point, even if they are minor. A clear resolution process, such as mediation or arbitration, can help avoid lengthy and costly legal battles.
• Confidentiality and non-compete clauses – Outline the specific expectations for maintaining confidentiality, including handling sensitive information and the duration for which these terms bind shareholders after leaving the company.

What happens if you don’t draft a shareholder agreement?

Without an agreement, you leave yourself open to the possibility of falling into situations without clear guidelines for proceeding.

This can lead to escalated disputes, and worse, the potential for one shareholder to lose out financially.

Here’s an example of a potential outcome in which a company did not draft a shareholder agreement:

Two co-founders of an e-commerce start-up each own 50 per cent of the business. When their vision for the company diverges, they’re at an impasse.

The situation drags on for months without a shareholders’ agreement to define how disputes should be handled or how a shareholder exit should be managed. Several opportunities are missed, and the business fails to grow.

Eventually, the company is forced to be sold off at a fraction of its potential value, with both founders walking away disappointed.

Had a shareholders’ agreement been in place, the dispute could have been handled efficiently, and the company’s future might have taken a much different, more profitable course.

Contact our company and commercial law specialists to ensure your business does not suffer the same tragic fate as the example above.

Our specialists can advise you on how your company might benefit from a shareholders’ agreement and can draft an agreement appropriate to your company’s specific needs.