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Importance Of A Shareholder's Agreement

August 2018


A shareholder’s agreement is a contract between the shareholders of a company. The purpose of it is to outline the procedures to be followed within the company and how the company is to be managed. It can also serve as a means to address issues that might cause shareholder conflict in the future. It is confidential and is not available to the general public. It can be very beneficial to family companies as an aid to avoid disputes further down the line. Matters that are often addressed in a shareholder’s agreement are as follows;

SHARE TRANSFERS
Provisions can be put in place to restrict the transferability of shares. Consent of other shareholders can also be added and provisions for what happens in the event of divorce or death.

DIVIDEND POLICY
Differing shareholders may have differing views on how to distribute the wealth of their company. A shareholder’s agreement can be used to agree upon such a policy.

VOTING RIGHTS  
The agreement can provide for clauses which state that certain decisions may only be reached if a certain % of shareholders approve of it. This would help protect minority shareholders in many instances.

SHAREHOLDERS EXIT FROM BUSINESS
Conditions can be put in place for share valuations upon a shareholder’s exit from the company. Other clauses include the rights for other shareholders to buy the shares before they are offered to the market and the right for other shareholders to buy the shares at a discount compared to third parties.

CONFLICT MANAGEMENT
This can be of great benefit to shareholders and can provide a roadmap to be followed in the event that shareholders have a dispute. This can help prevent significant legal bills in the future.

Although it is often far from people’s minds at the time, the best time to introduce a shareholder’s agreement is when a company is being set up. Where this is done, it can be of great benefit to the company and its shareholders.