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Why Your Business Requires a Shareholders Agreement

BY Rebecca | 27 October, 2015 | no comments

Any business, no matter its size or ambition, should have a shareholders agreement if more than one shareholder exists. This is used to govern all issues between those parties, and it’s often more important when shares are equal. Despite this, many businesses fail to draw one up; here’s why you shouldn’t be one of them.

Disputes Could End Your Business

People often assume that they understand each other’s goals, and that business changes and issues which arise in the future will be dealt with smoothly. However, this may not occur. For example, once profits start to rise there could be a disagreement over whether to reinvest the money or simply reap the rewards. Such disputes could lead to a breakdown of the business. Having a shareholders agreement means that there is a legal document which sets out exactly how decisions are made when parties disagree.

A Shareholder Will be Able to Leave the Business

If one of the major shareholders wants to leave the business, how is that going to change things? Those shares could have become too expensive to be bought back. What if a shareholder dies and leaves their beneficiary in a significant – or even controlling – share in the business? These might not seem like plausible scenarios, but they’re still possible, so you need to know how they will be tackled. A shareholders agreement provides protection by setting out guidelines for such situations.

Loss of Control

If a major shareholder decides to leave the business, they will be entitled to keep their shares, or even sell them to the highest bidder, if you don’t have a shareholders agreement in place. These situations could dramatically impact your business, but a prearranged agreement would, for example, stipulate that shares must first be offered to other shareholders at a fair price, or that resigning must entail returning said shares to the company.

A shareholders agreement should ideally be drawn up before a business begins trading. If you don’t have one yet, make sure that you contact a legal professional today. They’ll address your questions and help you draw up a finished document which will protect your business in the future.


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