A shareholders’ agreement is often the most important document for a company – especially a start-up company. They set out the rights and obligations of shareholders, how the business is structured, controlled, and governed. And whilst entering into a new opportunity is exciting, and everyone is feeling optimistic about the future, sometimes things don’t go as planned. And this is why a well-written shareholders’ agreement can be so valuable, on the off-chance things do go awry.
To reduce any risk of a dispute before entering into any new business relationship, a shareholders’ agreement should be drafted and agreed upon by all parties. The agreement should provide transparency and certainty around the rights and responsibilities of the company, the shareholders, and its directors. The agreement should also be clearly understood by all parties. By ensuring everyone understands and agrees on all points, you will be able to run a more efficient and effectively managed company and reduce any risk for disputes to arise. A shareholders’ agreement that minimises the potential for disputes will also be a key requisite for prospective investors down the road.
Key terms the agreement should cover include:
The agreement should include initial contributions, how the company can raise capital, the terms on which any advances are to be repaid, and a policy for how and when dividends will be paid to the shareholders.
A clear outline of the responsibilities of the board and directors should be included. This should include matters relating to day-to-day operations, which decisions can be made by directors and which must be approved by shareholders. It should also specify which matters must be approved at the board level by the majority, or by unanimous agreement. Agreements could also address voting rights, authorisation levels, and major transaction approvals.
There should be a clear outline and agreement around issuing and selling shares. Also around valuations, transfers, and the process when shares are to be sold, including pre-emptive rights.
Dispute resolution clauses including exit strategies and restraints of trade following exits. Agreements may also include mechanisms for resolving deadlocks when decisions cannot be agreed upon by the directors or shareholders.
It is never too late to put a shareholders’ agreement in place. So whether you have already set up your company or are in the process of setting one up, we highly recommend you consult your lawyer and accountant to draft an agreement that works best for you and your business. All companies are unique, so any shareholders’ agreement should be tailored specifically to yours.
For further information on this subject, please make contact with Michael O'Hagan, he will be able to help you.
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