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The importance of a shareholders' agreement

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The importance of a shareholders agreement

People go into business together to create something positive, not to fall out. Nevertheless, misunderstandings and differences of views can and do arise as businesses evolve. If you are a shareholder in a company, a shareholders’ agreement will help manage expectations at the outset and provide a mechanism for resolving potential differences.

Tailored to accurately reflect how the business operates, a shareholders’ agreement will ensure that all shareholders know where they stand. They can set out your rights, such as those in respect of appointment of directors, and your responsibilities, for example dealing with potential conflicts of interest. They can also make explicit certain restrictions such as those relating to the future sale of shares or the setting up of competing businesses.

Shareholders can fall into the trap of thinking they can rely solely on a company’s ‘Articles of Association’ when, in reality, the Articles are essentially a contract between the company and its shareholders rather than an arrangement detailing the relationship between shareholders themselves. Shareholders’ agreements can be particularly important where there are shareholders with a significant minority interest but, as a consequence, potentially limited rights or where a company is owned 50:50 by two shareholders where there is the potential for deadlock in the absence of a pre-agreed mechanism to resolve disagreements.

Shareholders’ agreements should be considered not only at the outset of creating a new company but also whenever there is significant change to the business or to the composition of its shareholders. With such agreements in place, the risks of costly, stressful and damaging legal disputes are significantly reduced.