Why It Is A Good Idea To Establish A Shareholder Agreement Before Starting A Business
If you are starting a business with others as partners and you wish to incorporate your business, it is vital that you establish a shareholder agreement prior to opening your doors for business. The time to get everything ironed out and agreed upon is the time before any actual business is transacted. This simply sets the stage for agreement among the shareholders of the business, as each one will sign off on it, signifying agreement to the terms.
Shareholder agreements are necessary in order to protect the shareholders because if anything goes wrong and a disagreement ensues, the agreement is the document that everyone can stand on, and one which will hold up in a court of law, if drawn up properly. Having a well thought out agreement in place will help to solve any disagreements as far ownership percentages, as well as rights and privileges of the shareholders.
The terms of the shareholder agreement will outline who the owners of a company are, and the nature of their roles in the company. Roles and duties can change as time goes forward, but if they do and when they do this can be noted as amendments to the agreement itself. Since the agreement and the duties will be agreed to in writing in front of witnesses and notarised, there will be no disagreement outside of the shareholder agreement that will be recognised in court. Disagreements can escalate very rapidly to being out of control and unless there is something in writing to verify the original intent, a company can be destroyed by infighting.
If there are disagreements that occur later in the company’s lifespan, then there should be a mechanism to have one shareholder be able to buy or sell shares to help in mitigating the dispute. Also as far as duties, there can only be concessions made if all the shareholders agree. The idea is that since all the shareholders started the company in a cooperative manner, there should be mechanisms in place to keep it that way.
Also in the agreement should be a plan of succession in case one or more of the shareholders should die, retire or becomes incapacitated. If a plan is already in place when and if these events occur, then there is no question as to how it will proceed to realign the ownership and duties of the shareholders. A plan for buying and selling shares should be in place to transfer ownership to the remaining shareholders if such an even should occur.
If a shareholder dies, then his shares would normally go to his heirs when his estate is probated, and this could spell disaster for the company as you would have an inexperienced relative involved with the company. If a buy and sell arrangement is in place, then the estate of the deceased would be obligated by the terms of the agreement to sell the shares back to the company in return for a prior agreed to amount. The money to pay for the purchase back can be funded with a life insurance policy paid to the corporation, and then redeemed to the surviving relative, usually a spouse, for the exchange of the shares of stock.
Never rely upon oral agreements, as they are as fickle as the wind, as it is very difficult to get an oral agreement to stand up in court, unless there are iron clad witnesses, and then it can be quite a challenge. Always have written agreements that are witnessed and notarised by a licensed notary. In this way you will always have an iron clad shareholder agreement that will be the basis of how the corporation will be operational moving forward.
The key to a successful shareholder agreement is the legal clarity of the document. You do not want any areas open for “interpretation”. It is in the everyone’s best interests to have an explicit explanation which is legally clear and not ambiguous. To do this, it is best to contact an experienced North Shore commercial lawyer who can draw up the shareholder agreements. North Shore companies will derive great benefit over the long haul by undertaking this simple task. One of the biggest law firms in the area is McVeagh Fleming and Co who have a team of business, contract and corporate lawyers who can help.
Of course shareholder agreements can be changed and altered as the case may be, but only with the agreement of all parties in order to keep the original integrity in place as first intended.