Your company isn’t required to have a shareholder agreement, but it is a good idea to have a contract in place between shareholders and the company to prevent and resolve problems. Any time your business has more than one shareholder, the potential for disagreements exists. A shareholder agreement ensures that there is clarity regarding who runs the company and how the company is run. The agreement protects shareholders, defines the limits of their responsibilities, and makes clear what managements’ role is. In a properly-executed shareholder agreement, everyone’s interests are protected and the company benefits from the stability of all parties knowing their rights and responsibilities.
Some shareholder agreements, however, can end up confusing issues and can leave important provisions out. You don’t want an incomplete contract or an unclear agreement or your business could actually be worse off than if you had no contract at all. While every shareholder agreement should be written with the help of a lawyer and tailored to the specific business, there are some standard provisions that are found in most contracts. Here are 10 key things to be sure that you include in your shareholder agreement.
1. Details about how directors are chosen (and removed)– Shareholders may have the right to appoint and remove directors. The shareholder agreement should specify any rules for how this right is exercised as well as procedures used to elect or remove a company director.
2. Information on the power that managers and directors have– A company’s management structure has a big impact on how the business is run. A shareholder agreement should specify the rights and obligations of the managing director and details on how managers and directors divide up labor.
3. Provisions addressing the buying and selling of shares– Share transfer restrictions are common in small companies so that all of the shareholders have some say over who they end up doing business with. Provisions addressing the buying and selling of shares can also provide important protection to minority shareholders who may have difficulty selling their interests. The buy-sell details in the contract should not only include restrictions and rules for transferring or selling shares, but also details on how to value a shareholder’s ownership interests.
4. Details about what happens in the event of death, disability or divorce. Death, disability and divorce can all result in the affected shareholder needing to sell or transfer shares. The shareholder agreement should specify what the rules are when any of these events occur. Can the shares be willed to someone after death or can an ex-spouse get an ownership stake in the business? If you don’t address these issues, big problems could result when people end up co-owning a company with someone they don’t like and don’t want to work with.
5. Protections for the business and shareholders in the case of involuntary transfers. Bankruptcy is just one situation in which a shareholder may be forced to transfer an ownership interest against his will. Without a shareholder agreement, company owners may end up having no say in what happens to shares of their business.
6. Specifics about financing of the business– The contract between shareholders needs to specify how each co-owner of the business must contribute to providing the company with working capital. The contract should also provide details about what happens if any one of the shareholders is not able to come up with the money that is required of him to maintain business operations.
7. A procedure for resolving disputes– Conflicts invariably arise whenever multiple parties are in business together. Conflicts may arise between shareholders and directors and managers, or among different shareholders with individual ownership stakes in the company. There must be a procedure outlined for how these disagreements should be resolved so arguments are limited and business operations are not crippled by an impasse.
8. Clauses specifying requirements for meetings– Regular meetings should be held between shareholders and directors, and additional meetings should be held when something important comes up. The shareholder agreement should specify when meetings are to be held, the procedure for forming a quorum to vote on issues, and how meetings can be called when special issues arise.
9. Rules and restrictions on company contracts– Shareholders of a business can sometimes contract with a company, although this can create conflicts of interest. A shareholder agreement should specify when, and if, contracts are permitted. The agreement should also provide details on terms and restrictions that may apply when a shareholder enters into a company contract.
10. A confidentiality clause– You don’t want your business information to become public knowledge. Shareholder agreements should be kept confidential and the contract should contain a clause binding all co-owners to keep silent about the specifics of the company agreement.
These are just some of the different provisions that should be included in your shareholder agreement. You need to ensure you do everything possible to protect your investment and give the company an opportunity to grow and thrive. At Owen Hodge Lawyers, we can help you to negotiate and draft a contract for shareholders of your business that should do a good job setting the tone for the shareholder relationship and protecting your company’s future. Give us a call today at 1800 770 780 or contact us via [email protected] to learn more about how we can help you.