Shareholder Agreements: Why You Need One

June 11, 2021 (Investorideas.com Newswire) Though they are not a legal requirement for businesses, a shareholder agreement is considered an essential document for companies of any size. Not only does it offer a clear framework for the role shareholders play within the day-to-day running of the company, it can also provide a degree of protection for all parties involved in the event that a dispute should arise.

Each company will require a unique shareholder agreement and, in order to ensure clarity and fairness, it is always recommended that you call upon the assistance of an experienced law firm to help with the document's composition. Keep in mind that working with a law firm local to your area will help the entire process to go more smoothly. If your company is based around Gloucestershire, for instance, look at solicitors Cheltenham.

1. It Offers Clarity Over Shareholders' Duties

One of the main purposes of a shareholder agreement is detailing the rights and responsibilities of the shareholders themselves. This will, of course, differ greatly between companies, which is why every shareholder agreement should be unique, and tailored to the dynamics within a particular business. In many cases, the clarity of the shareholders' rights and responsibilities set out in the document will nip disputes in the bud.

2. It Stipulates a Procedure for the Sale of Shares

Selling shares to other parties can cause devastating rifts between shareholders; without a clear agreement in place, there are no legal regulations on the transfer of shares to outside parties, or competitors. An agreement creates a safety net for shareholders, and offers them some control over and transfer of shares.

3. It Explains How the Company Should be Run

While the board of directors is typically in charge of running the company day-to-day, the shareholder agreement may be used to stipulate further control for shareholders. Disputes can easily arise when opinions differ over the way the company should be run, and a shareholder agreement aims to keep everyone on the same page.

4. It Protects Minority Shareholders

If needed, the agreement can state that certain decisions cannot be made without unanimous agreement from all shareholders, which gives minority shareholders greater weight in certain areas that impact the company, such as revising the company's articles of association.

5. It States How Certain Decisions Should be Made

Shareholders may wish to have greater control over certain decisions, and may wish to create a procedure through which directors require shareholder consent on certain matters. Again, the extent to which shareholders wish to control certain matters will differ greatly between companies, which is why a bespoke agreement must be written in order to avoid disputes.

6. It Will Alleviate Disputes Down the Line

Without a shareholder agreement in place, the company may be at a higher risk of disputes, which can, in some cases, lead to irreparable issues within the company. It is far more difficult, costly, and time consuming to settle matters where two (or more) parties believe the other to be acting unreasonably; by signing a clear agreement now, shareholders can mitigate future disputes by referring back to the document whenever an issue arises.

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