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A Shareholders Agreement can help to regulate the relationship between the business and the shareholders and helps to prevent confusion and disputes. Here are a few ways it does that.
Day to day affairs
The board of directors manages the day-to-day running of a company. But occasionally, shareholders will feel that certain important decisions should be made at shareholder level. A Shareholders Agreement will allow shareholders to approve fundamental decisions.
Transferring and valuing shares
An agreement can detail the procedure for selling and transferring shares. Often the shareholders and the company will be offered first refusal of shares to be sold. This is useful for preventing competitors or persons outside of the company from acquiring shares and can allow family-run companies to ensure shares remain within the family. A Shareholders Agreement can also detail how the shares should be valued should a shareholder wish to transfer or sell their shares.
Protection for minority shareholders
Ensuring that the interests of minority shareholders are protected is important. Within an agreement, this can be achieved by providing that fundamental decisions require the unanimous consent of all shareholders. This ensures that the balance of power is redressed and minority shareholders are not prejudiced.
Preventing fall outs
Disagreements may occur between shareholders, even if at the outset this is difficult to foresee. A Shareholders Agreement can provide a structure to resolve these disputes, without having to resort to litigation. This could save time and cost in the long run.
What happens if a shareholder ceases to work with the company or dies?
If a Shareholders Agreement is not in place it could mean that when an individual leaves the company they could retain their shares, which may not be desirable, especially if they go to a competitor.
A similar problem could arise if a shareholder dies, becomes mentally incapacitated or becomes bankrupt. A Shareholders Agreement could provide the company and/or other shareholders with an option to acquire these shares – preventing them from falling into the hands of an unknown third party.
Unlike other company documents, a Shareholders Agreement is a contractual document that remains private and confidential between the parties. Once in place, the agreement can only be amended with the consent of all of the shareholders. This provides future protection for minority shareholders. A Shareholders Agreement provides security not only for the shareholders, but also for the company. This makes it an essential document for any company with multiple shareholders.