What Makes A Good Shareholders Agreement?
Before officially forming a company, there are a hundred little things to do much less consider. If you’re going into business with others, a shareholders’ agreement is one of the more important documents from a legal perspective.
So, what is a shareholders agreement? How is it written? What goes in a good shareholders agreement?
A shareholders agreement is a type of business agreement between the shareholders of a company. They’re meant to be safeguards for your business and any investments into the company. Of course, you may trust your friends but there are more cases where shareholders wished they had put a proper agreement into place.
Generally, companies are run by majority decisions which can be detrimental to minority shareholders. It means that they’ll have less control or say in running in the company. An agreement can help protect their rights. Minority shareholders may want to include a “tag along” provision – if someone wants to buy the shares of a majority shareholder, they must also make the offer to all the other shareholders before the majority shares can be sold. This provision can help you protect your return of investment and ensure you receive the same returns.
For majority shareholders, provisions such as a “drag along” provision may prove to be beneficial. A “drag along” provision forces minority shareholders to sell their shares in the event that you want to sell yours but a minority shareholder is unwilling. Competition restrictions (non-compete clause) such as preventing shareholders from setting up rival business may also be beneficial to protect your business.
A good time to implement the shareholders agreement is when you first form your company and distribute the first shares. It’s also good to ensure that your shareholders understand the agreement and the expectations of the business. You can discuss the terms and expectations with them but always ensure you get a lawyer to help you draft the agreement itself. Shareholders’ agreements are voluntary and consensual, they must be fair and reasonable to all.
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