Why It Is A Good Idea To Establish A Shareholder Agreement Before Starting A Business


North Shore commercial lawyerIf 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.

Meeting between Start-up directorsIf 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.


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.