When starting a business, most people focus on growth, profit and market strategies. But don’t overlook a shareholder agreement, writes RMB Lawyers Partner MICHAEL LEWIS.
Think of a shareholder agreement as a “rulebook” for the company. It sets out who can do what, who has a say in key decisions, and what happens if a shareholder decides to leave or needs to be bought out.
Unlike the company constitution, which is more generic, a shareholder agreement is custom-made to fit the unique needs of the business and its shareholders. It covers critical aspects like voting rights, profit sharing, management roles, and plans for unforeseen events like a shareholder’s exit.
Without clear, upfront guidelines, even the closest business partners can find themselves at odds. A shareholder agreement acts as a safety net, helping to prevent disputes and ensuring everyone is on the same page. By setting clear expectations from the start, this document helps avoid misunderstandings that can strain relationships and disrupt the business.
For example, if one shareholder wants to sell their stake, the agreement outlines the process, ensuring a fair approach for everyone. It also spells out each person’s responsibilities and rights, protecting minority shareholders and preventing one person from making all the decisions.
Steps to Creating a Strong Shareholder Agreement:
- Identify Key Issues: First, you’ll need to pinpoint the issues that matter most to everyone involved. This could be decision-making power, profit distribution, or what to do if one partner wants to exit the business.
- Bring in Legal Expertise: A commercial lawyer is essential in drafting a robust agreement. They know the common pitfalls and can help tailor an agreement that protects all parties.
- Review and Agree: All shareholders should review and agree on each term. This step ensures everyone understands their role and obligations clearly.
- Make it Official: Once everyone is satisfied, sign the agreement and keep it on record. This formalises the rules and provides a structured approach if conflicts arise.
Running a business without a shareholder agreement can be risky. When disputes arise, whether it’s about strategy, finances, or management, there’s no agreed process to fall back on, leaving the business vulnerable. Minor issues can escalate, leading to costly legal battles or even the potential breakdown of the company.
If your business doesn’t have a shareholder agreement, it’s worth making it a priority. Consulting a lawyer now could save you substantial trouble, and expense, later.
RMB can assist with shareholder agreement for any business, your first step should be to contact our office to arrange a consultation. You can contact us by by phone or our 'Ask a Question' tool on our website.