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How important is the Shareholder’s Agreement for your business?

If you are thinking of starting a business with two or more shareholders then taking into consideration the shareholders agreement is very important.

This agreement is a way to control the different actions shareholders can perform.

But do not get confused with partnerships.

A key factor of the shareholders’ agreement is that it is a private agreement which allows a company’s shareholders to enjoy confidentiality within the business. It provides the following benefits:

Shareholders can retain the right to make certain decisions

Shareholders can have the authority to make some decisions which they believe are not fit for the directors, such as financial decisions exceeding a certain value and so on.

Sense of direction

The agreement can bring direction and stability to a company as shareholders can deal with future events and disputes.

Share issue

This agreement also creates a mechanism which makes shareholders who wish to exit the company to have to sell their shares to the other shareholders.

The shares to be valued by the company accountant

 If a shareholder decides to sell their shares, the price can be decided by the valuation.

Flexible dividend policy

The agreement allows for the different payments to be paid to different shareholders depending on the type of shares that they own. 

Shareholder/employee relations

 If a director or senior personnel contract is terminated, the shareholder agreement can allow for that person’s shares to be returned to the company or just simply sold.

Minority shareholder protection

The shareholders’ agreement allows protection to the minority shareholders as it grants them certain decisions within a company. This can help to prevent future disputes.

Majority shareholder protection

If an offer is presented to buy all the shares in the company, the majority of shareholders might want to be able to  make the minority of shareholders to accept the deal.  

Nothing stays the same

 The agreement helps ensure that if shareholders decide to leave, the remaining

Shareholders can create restrictions on the exiting shareholders to prevent them from setting up a competing business.

Resolve Disputes

The shareholders’ agreement includes requirements for dealing with disputes  – it is far cheaper to resolve them this way than through potentially costly legal proceedings. 

Shareholders do have disputes

The agreement makes shareholders set out mechanisms in the early stages of  company formation in an attempt to make future disputes less likely.

The benefits that have been listed above demonstrate why the shareholders’ agreement is important to all small businesses as their main purpose is to protect the shareholders and the company.

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