5 reasons you need a Shareholders’ Agreement (or a business will)

March 17, 2020 admin

Shareholders often forget that a Shareholders’ Agreement can act as a will for your business.

Often a Shareholders’ Agreement simply covers what shareholders can and can’t do, powers to remove or appoint directors and how dividends are dealt with. In reality, they can do much more. Here are 5 reasons why you need one for your business:

1. If a shareholder leaves, what happens to their shares?

You can include a clause that sets how the departure is dealt with (a good leaver or a bad leaver) and how the shares are valued as a result. Good leaver = better valuation, bad leaver = poorer valuation. The precise wording can be tailored to suit a probably outcome – a likely sale of shares due to ill health – or an undesirable behaviour – a falling out with other shareholders to give everyone clarity and value.

2. If new shares are issued, will your shareholding be diluted, will you have to pay in more money to keep a certain level of ‘ownership’?

Companies often issue more shares to raise money. A Shareholders Agreement can ensure that you, as a shareholder, have input on the decision to do so and on whether you are offered the shares before external parties and at what price.

3. If a director doesn’t perform are you able to remove him or her?

Shareholders do have certain powers, but these can be enhanced to ensure your interest in the company doesn’t suffer. If the statutory powers aren’t suitable for you, then they can be altered or enhanced (or reduced) through a clause in a Shareholders’ Agreement. There will need to be a balance to be struck between the independence of the directors and the powers of the shareholders.

4. Can a departing shareholder take all their knowledge and contacts to a rival?

Shareholders are not employees so cannot have restrictive covenants imposed on them through an employment contract, so unless there is a Sharheolders’ Agreement in place with suitable clauses they can take your commercially sensitive material with them to a rival.

5. If you don’t think the above apply now, are you willing to bet your future on them not happening?

How about when the shares of the business you started with your fellow shareholder ends up in the hands of their cavalier offspring who may have very different ideas on the way the company should be doing things. Shareholders’ Agreement are the best way for shareholders to understand what they can and can’t do and to ensure that they have clarity should there be a dispute.

Do you think you and your company could benefit from a Shareholder Agreement? Speak to us today.

Importantly, Amgen Law has provided this Insights article for information only and nothing in it should be constituted as legal advice. However, if you would like to discuss any of these issues further about a legal matter that is affecting you, please get in touch with us directly using the form below.