subject: Why You Should Prepare A Shareholder Agreement When Starting A Business [print this page] It is a tried and tested method of running a business; the directors make the decisions regarding day to day activities and the shareholders actually own the business. This concept works well while the business is still reasonably small and the owner still manages it, but when several generations are involved or when new investors arrive on the scene, it can get a little complicated.
If the founder wants to retire, should he be allowed to retain his shares and continue to draw dividends? Should he be able to vote on strategic company decisions? What if a shareholder sets up in competition with the Company? Suppose you have equal shareholders, and they cannot agree how to take the business forwards? Conflicts tend to arise where the owners want different things for a company.
Potentially, situations like this can be crippling for a business because a stand still in decision making benefits no-one and resolving an argument between high-ups can be a lengthy and expensive process. Lengthy because neither side will want to give in and expensive because so much management time goes into resolving the conflict that the business suffers.
All of these matters, and more, can be avoided by putting in place a well drafted shareholder agreement. Some careful thought and guidance in the early stages of a businesses life can avoid problems later on. It is a private document between individuals and will remain hidden from public view.
Income distribution, decision making, succession and share valuation are just some of the things that can be covered in a shareholder agreement, also, there is usually a set of pre-emption rights giving current shareholders first refusal on shares should other shareholders wish to sell. If it is written in the agreement that shares can only be owned by people working within the business, then rules can be made to force a share transfer in the event that someone leaves.
An agreement can establish that certain activities need all, or a certain percentage, of shareholders to agree. This gives small minority shareholders a much greater say in how their company is run than would otherwise be generally available.
Of course how simple, or how detailed an agreement you reach is entirely your choice, but unless an area is dealt with at the outset, it cannot be concluded decisively in the event that a dispute arises later on.
