Thursday, July 26, 2012

How a Shareholders' Agreement Can Protect You and Your Business

Corporate law doesn’t offer a solution for every potential conflict that can occur between partners or shareholders during the course of running your business. Which is why creating a shareholders’ agreement can be a very smart thing to do to protect yourself.  There are many situations in which a shareholders’ agreement can get you of trouble. Here are a few examples:

·         An unfortunate event that occurs such as a conflict with one of the shareholders, an accident, bankruptcy or even death of a shareholder

·         When the shareholders want to maintain equal equity within themselves

·         When shareholders want to participate in company decision-making, such as the introduction of new partners in the company

·         Or changing the shareholder voting rights

Even if you have less than three shareholders, you should write and sign a shareholders agreement. The departure of a partner or even a disagreement between shareholders can often lead to bad blood within your company.  And in situations like these, you want to make sure you’re protected.

If you want to have the best shareholders’ agreement that meets your needs, it is advisable to consult a lawyer. He will determine what clauses should be included in the agreement and suggest solutions tailored to your situation and that of the shareholders. Expect to pay a few hundred dollars for a lawyers’ service.

If there is a dispute or uncertainty on how to proceed in a particular situation, you can refer to the shareholders' agreement for guidance. In the event that the agreement does not cover a particular circumstance or the situation cannot be resolved by the shareholders, an arbitration clause can be inserted in the agreement that requires the dispute to be referred to an independent third party.

Here are some of the clauses that you should be aware of and may wish to put in your agreement:

1.       First refusal: This allows shareholders to have a say over the sale of their shares to someone else who is not a part of the company.

2.       Mandatory offer due to death: Provide what will happen upon the death of a shareholder

3.       Mandatory offer due to withdrawal from business: Provide for situation which could lead to the withdrawal of a shareholder from the company for various reasons

4.       Pre-emptive right: Protects the rights of the shareholders against issuing new shares by the Board of Directors

5.       Shotgun clause: Protection from any disagreements between shareholders

6.       Working conditions: This outlines the working conditions governing the shareholders who work for the company

7.       Voting: Allows shareholders to be elected as board of directors

In starting your business, you should hope for the best, but plan for the worst to occur. By using a shareholders' agreement, you save money, time and frustration in the long run. What you get is greater trust and peace of mind between you and your partners which is fundamental to every successful small business.