Why bother with a Shareholders Agreement?
Many business partners start because they share a compelling vision which they hope to turn into a successful venture. But, regardless of how well business partners know each other, conflict is common. Nothings lasts forever.
Whether a venture flourishes or turns out not to be as rewarding, the reality of changing views on strategy, implementation and management plans can cause deep and irreparable divisions between business partners.
A Shareholders Agreement is a useful tool for business management, dispute prevention and succession planning. By outlining the way that the business should be managed, it clearly identifies the rights and obligations of the business partners and leaves little room for misunderstandings and uncertainty.
Some of the common themes addressed in a Shareholders Agreement include:
- How decisions are made and voting rights
- How to plan for when a partner may join, leave or retire
- Expectations regarding the management of the activities of the business
- How the business can be reorganised
- What triggers a mandatory sale of the business
- How disagreements and disputes are handled (without going to court)
- How a deadlock in decision making can be resolved
We outline the top 3 benefits of shareholders agreements below.
Shareholders Agreement and Asset Protection
A Shareholders Agreement allows for the assets of the business to be protected by legally preventing the disclosure of confidential information, setting out the mechanism for resolving conflicts of interests, restricting partners from dealing with competing businesses and restricting key people from poaching customers if the business relationship was to break down.
A well drafted agreement provides control, predictability and protection and ensures that costly legal battles are avoided.
Disputes and Deadlock
When difficult situations arise between business partners or the business falls on tough times, the Shareholders Agreement sets out a clear procedure on how to resolve disputes including steps to bring disgruntled partners back together such as mediation or arbitration. When there is a dispute about a key business decision or a deadlock about the future direction of the business, the agreement sets out resolution mechanisms that can save the business from being stuck in a deadlock and secures the value of the business for departing partners.
A carefully considered Shareholders Agreement covers in detail the fundamental methods of business management including procedures on the appointment of directors, composition of the board, the scope of directors’ duties and the decision-making powers of the board. By outlining the responsibilities, powers and rights of both minority and majority shareholders in relation to funding, prohibited activities, profit distribution and the issuing and transferring of shares, the agreement acts as a blueprint for the successful operation of the business. Outlining the information regarding company management ensures that both directors and shareholders are well aware of their business obligations and the overall structure, nature and overarching aims of the business.
To learn more about Shareholder Agreements , please contact us on (02) 8094 1247 or email us at firstname.lastname@example.org.
Ehsan acts as legal counsel to entrepreneurs and is dedicated to maximising value, reducing risk and devising exit strategies. He has advised local and international entrepreneurs in industries such as information technology, property, telecommunication and e-commerce.
His main areas of practice are commercial law, asset protection, property law and technology.