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5 Key Reasons for a Shareholders Agreement

As a business law firm, Priority Business Lawyers is often approached by disgruntled shareholders and directors seeking a solution to a dispute that they are having with other key stakeholders in the business. Often one of the first questions we ask is: “Do you have a Shareholders Agreement?” Invariably the answer is “no”. We then generally advise them that unless they can mediate the dispute the matter will end up in litigation and no one will win other than the lawyers! This is obviously totally unsatisfactory to all concerned. It begs the question why not a Shareholders Agreement?

The key five reasons for having such an agreement are:

1. It provides certainty – It will set out generally the rules by which the company will be governed and the rights and obligations of individual shareholders and directors in the running of the business.

2. It can avoid litigation – By having a well crafted dispute resolution clause in the agreement and certainty about other aspects of the business and administration of the company, then the parties have a methodology by which to resolve their disputes.

3. It provides checks and balances – The rights of all shareholders including those in minority can be protected and rogue activity by unreasonable directors and/or shareholders may be checked by ensuring that there are several restrictions imposed on conduct and behaviour in the running of the enterprise.

4. It provides a succession plan – One of the essential features of a well drafted Shareholders Agreement is to deal with a succession plan including a procedure for selling or buying shares and the  introduction of potential new shareholders. Failure to do so can result in catastrophic circumstances where you might end up in tears as a result of having to finance the buyout or even worse, having a business relationship with a relative of a shareholder like a wife, husband or child you do not wish to deal with.

5. It provides an opportunity – Often business people including shareholders do not make provision for catastrophic events such as temporary and permanent disablement and death. A well drafted Shareholders Agreement can incorporate within its provisions requirements for the company to fund the premiums of key man and, life and TPD insurance for the benefit of all concerned.

At PBL we are regularly instructed to draft Shareholders Agreements for business people.

If you have not turned your mind to it, now might be an appropriate time to consider the preparation of a Shareholders Agreement. It will provide peace of mind and an opportunity to deal with important issues in the business.

For further information phone 4305 3500 or Contact David

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