Establish A Shareholder Agreement Before You Start Your Business

 

A shareholder agreement is an important contract to consider, even when your business is only in its planning stages. It may be depressing, but think of a shareholder agreement as a type of living will for your business. Much like your own personal will, a shareholder agreement will keep your company operating as you want it to, despite unforeseen events.

 

Shareholder agreements are intended to protect the owner or owners of a business. The agreement may not be necessary until a business has attracted the attention of potential investors, but it should be in place from the get go to avoid conflicts as the business grows. Owners won’t want to have their interests undermined once a successful business goes public.

A shareholder agreement first outlines the owner or owners of a company, and what their roles in the company are. Roles can and probably will change over time, but it’s a good idea to have it in writing, especially if the business is a partnership. Things can get ugly, and possibly destroy a company if later on down the line, there’s an argument about who plays what role in the day-to-day operations of a company.

 

The next part of the agreement is intended to protect the shareholders (investors in the company) and the company’s owners (those who own the majority of the shares). As an example, if an owner wanted to sell their shares in the company without a shareholder agreement, they would be free to do so without any ramifications to themselves. This would leave the business to be taken over by a third party without any input from other owners or shareholders.

 

By having a shareholder agreement in place, an owner would first have to present their offer to sell their shares to other owners, and shareholders of the business. The owners and shareholders would be able to approve of the sale and take on a new partner or have the option of purchasing the shares themselves. This removes any conflict of interest and allows owners and investors to choose the direction of the company without any personal or legal disruptions.

 

The shareholder agreement also includes a succession plan. If an owner retires, passes away, or if some other unforeseen event occurs, where an owner can’t fulfill their routine duties in the company, the shareholder agreement dictates who will take over that position. It’s also a good idea to have a buy-sell plan in place.

 

When an owner of the company passes away, generally their estate will go to their beneficiaries. Their assets will include their shares in the company. If a buy-sell plan is not in place, this can open a can of worms for the company as the inheritor has a right to ownership and some level of control.

 

As an example, without a buy-sell plan, the beneficiary could sell all their shares to an unknown third-party and possibly instigate a takeover of the company. They could also dispute the value of their shares or take on a role at the company, even if they have no experience with the business. This could possibly ruin the business for other shareholders and investors.

 

A buy-sell plan dictated by the shareholder agreement allows the owners to buy back the shares from a deceased owner’s heir or heirs. It states the value the company will pay for the shares to eliminate any arguments. Shareholder agreements are also legally binding so there would be no contention in court.

 

Shareholder agreements protect the interests of owners and investors in a business. They govern rules to keep the company operating smoothly despite unforeseen circumstances. If a shareholder agreement is put in place before starting a business, there will be very few, if any problems down the line, about the direction and success of the business.

 

It is obvious from the above that you must talk to a lawyer about a shareholder agreement before you start your business. This is a good Albany commercial law firm in Auckland on the Shore. McVeagh Fleming & Co (www.mcveaghfleming.co.nz) has been providing legal services in the area for many years and is one of the largest law firms on the North Shore.