The Case For Shareholder Agreements

Our clients Dan and Jack are going into business together.
The Case For Shareholder Agreements

Our clients Dan and Jack are going into business together. They have formed a company, and recently sought advice on whether they needed a Shareholders Agreement. They had found a generic Agreement on the internet, and weren’t too keen to pay a lawyer to write a new Agreement for them. Unfortunately, we often see the fallout from these types of arrangements. For many reasons, having a good Shareholders Agreement prepared by your lawyer can ultimately save you time and money in the long run. 

A company is one of the most common forms of ownership of business interests. Complications however arise where unrelated (and sometimes) related parties enter into business together. These complications can often be avoided by having a written Shareholders Agreement in place that sets out the respective rights and obligations, and expectations of each party to a business relationship.

Raising and discussing issues before entering into business together can save a significant amount of grief and financial loss. Business failure caused by fallout of the shareholders can be sudden, acrimonious and ultimately can result in the appointment of a receiver or liquidator to salvage what is left of the business, often at financial loss to the shareholders and possibly creditors.

Shareholder Agreements do not need to be overly legalistic and complicated. At their simplest they do need to cover off-

  1. How the business will be funded- by shareholder loans or borrowing.
  2. What is expected of each shareholder (ie a job description).
  3. Decision making and thresholds- ie which shareholders may be entrusted with certain types of decisions about operating the company and business and how many shareholders are required to agree to certain types of decisions (ranging from a simple 51% majority for minor decisions to unanimous agreement being required for larger decisions/transactions).
  4. What would happen if one shareholder wants to sell, or upon the death or incapacity of a shareholder.
  5. How disputes are resolved- a pre-agreed process to follow.

Depending on the needs of the client, and the nature of the business, a good Shareholders Agreement can also deal with a variety of other matters and issues which could come up in the course of the business relationship.

We often see examples of Shareholder Agreements which have been provided ‘off the shelf’ which are unduly lengthy and complicated, and cover a number of matters that are not relevant (and often fail to cover off matters that are very relevant). When presented with an overly complex document, shareholders will either sign, thinking that the document protects their interests (when in fact it often doesn’t) or they put the document in the ‘too hard basket’ and it is never signed or seen again.

Business relationships can take a variety of forms. At Gallie Miles we do not use the ‘off the shelf’ model and will spend time with you discussing your business and how you intend to operate it in order to come up with an Agreement covering all of your requirements.

To discuss any aspect of your business needs (including Shareholder Agreements) in more detail, contact Bryce or Sue.  

By
Bryce Bluett
Director

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