Shareholder agreements – why you need one today
Let me ask you a question?
When will a husband and wife who decide to get divorced reach the fairer and more cost effective agreement?
- When they have drawn up a contract before marriage (while they were in love) discussing the procedures to follow in case of a divorce or
- When they and their lawyers sort out the details after their relationship have deteriorated to such a point that they do not want to stay together anymore and both parties are emotionally charged?
With that in mind when do you think is the best time for shareholders to agree and sort out certain issues?
Just as a couple who want to get married should discuss in great detail how assets will be shared, who will see the children when and how much each party will contribute towards the child’s support in case of divorce, shareholders should discuss certain matters in great detail when they are calm, rational and optimistic. And the best time to do that is before they start their business relationship as pressure and stress can build very quickly in a new business when things don’t go as expected.
Here are only a few of things a shareholder agreement should cover
- what the procedure is when one shareholder wants to get out of a failing business while the other shareholders wants to carry on. This is especially important if there are only a few shareholders and the business relies heavily on the security provided to the banks or on finance provided by the shareholder who wants to get out of the business.
- how differences in strategic vision will be addressed
- how disagreements that have reached a deadlock will be sorted out
- what the procedure is if one of the shareholder wants to sell his or her shares. How will the price be determined, who can he sell to, must he first offer it to current shareholders etc?
- what restraint of trade (if any) should be placed on a shareholder who decides to leave
- will interest accrue on loans provided by the shareholders to the business and how will a shareholder be compensated for the additional risk he is taking if their loan account is bigger than another shareholder
If shareholders cannot sort out the majority of issues while all parties are calm and optimistic, seriously ask yourself whether you should go into business with the other party. Because when things don’t go right and the pressure is on small disagreements can become big disagreements very quickly.
If you are starting a business or have been running for a while and need someone assistance with shareholder agreements please feel free to give us a call to discuss this matter further.