Shareholder Agreements in Place before Starting a Business Gives Clear Guidelines in Its Operations
Most businesses start out in a very congenial atmosphere with the founders having a shared interest in combining their talents for mutual benefit and profit from their company. They all bring their own different talents, expertise, qualifications and quite often their finances on to a common platform, and hope to profit from their efforts. This honeymoon takes them over the start-
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up phase, but once the business is set up, differences do crop up and disputes can lead to problems. This can be avoided by having clear shareholder agreements in place, before you put your business plans into action.
When no such agreements are in place, any disputes or course of action will have to be decided by the legal provisions that govern the firm whether it is partnership, a limited liability company or some other entity. In such a case, the law will prevail and none of the stockholders can have any say in the matter. The matter also comes into the public domain and negates any privacy. Clearly this will not be a good impression to customers or investors. But when shareholders agreements are in place, the course of action in the case of changing conditions within a business can be guided by the provisions made in the agreements. In such case, there is complete privacy, while the agreement ensures that there are no disputes.
There are number of situations that can arise during the operations of a company that involve shareholder interests, which can be guided by the provisions in a well-drafted and agreed shareholder agreement. These can be:
- The death or bankruptcy of one of the shareholders
- A shareholder wanting to terminate his or her interests in the business
- The exit of a minority stakeholder
- A demand by a shareholder to vote on a business decision in spite of not being on the board of directors
- A deadlock that is affecting the business
Definite actions can be drafted in to shareholder agreements that deal with action to be taken in such cases, and as these agreements will have been agreed to by each of them, the clauses in it are legally enforceable.
Mechanisms can be laid down in these agreements that allow a shareholder to exit, and the terms of valuation in such cases and the desirability or viability of accepting third parties. Provisions can be laid down that allow the other shareholders to take up the stake at an agreed price. In case third parties are acceptable, they may ask for positions on the board and the agreements will have to clearly state the conditions under which this is acceptable. There must also be complete clarity on how board members are appointed, and the powers that will be vested in them. It is also possible to impose restrictions on key shareholders through non-compete provisions, by entering into such agreements before starting a business. A clear mandate needs to be in place that decides on what happens to the shares of a person who dies, or is incapacitated. Some businesses favor trustees or heirs to take over the shares, while others may require them to be sold.
Shareholder agreements ensure that a business is never brought to a standstill in the case of disputes. It provides all shareholders a peace of mind, knowing well that all eventualities have been taken into consideration and the provisions of the agreement or Articles of Association can be used to regulate shareholders, while running the business or deciding on any bones of contention. There is no definite legal requirement in the drafting of such shareholder agreements, except that they must include provisions that follow the principles of natural justice. The clauses in the agreements must suit the shareholders in question and must be agreed to by all of them before they come into existence. When you have such agreements in place, before the business is started, potential disruptions are avoided and the business can run smoothly.
For people starting a business around Albany or a company lawyer on the North Shore is McVeagh Fleming lawyers. They have a number of partners and experienced solicitors who specialise in providing advice on commercial law and company ownership issues. You can get some background on their website here.