Shareholder agreements are drafted when the shareholders of a business want to dictate their own rules relating to shareholders and the higher level of running the business, funding and the financial rewards for the parties involved. The standard company law rules do provide a basis for this, but most serious businesses will make sure that they seek the advice of an experienced corporate solicitor to draft a shareholders’ agreement designed to meet the business requirements and goals of the shareholders.
So, how would you benefit from getting a shareholder agreement in place, rather than leaving it to chance?
Directors within a business are deemed by company law to run the business operations. The shareholders have very limited powers and rights to make operational changes and will be referred to only in a few instances that are outside of the operational running of the business. This can, and generally does, create concerns for shareholders as they will have less power over their investment.
Shareholders then will often want to change the rules so that certain requirements are met.
This will generally relate to voting powers, minority shareholders powers, veto rights, transferral and the issuing of shares to raise further funds, dispute resolution together with the mechanism used to resolve these issues which may include a third party, or an agreement of how shareholders can exit and sell their shares using a pre-agreed equation for calculating their worth. Outside investors may well want to protect their investments; having the ability to appoint directors and board members via the shareholder agreement will help them to do this. Other important areas to be agreed upon will be levels of borrowing and the means to which future funding can be obtained and upon what terms.
Shareholder agreements cover many more areas than briefly covered above and having a consultation with an experienced corporate solicitor will make sure that all areas required by the agreement are discussed, negotiated and understood. If the business you are investing in has not got a shareholder agreement in place that protects your assets/investment then it could be costly and the risk you are carrying will be a burden to you. Well-drafted agreements will give you more power and give you greater control over business decisions and therefore more control over the destiny of the asset you hold shares within.