A shareholders’ agreement is a settlement done between all or part of the owners of a company. It is a very important document because it regulates the most important actions in the company ownership.
For instance, a shareholders’ agreement clarifies the conditions of ownership and transfer of the shares, so that the interest of the community is protected from individual decisions.
Just imagine that you have a company and you need capital, so you decide to sell some shares. You may be willing to sell your shares to this buyer. But in case the buyer wants to sell their shares after some time, you may want to have the right to buy them before anyone else does. These kinds of dispositions are usually included in the shareholders’ agreement.
What Happens If There Is No Shareholders’ Agreement?
The main result of not having a shareholders’ agreement is insecurity and uncertainty.
Should disputes between owners arise, the people involved should look to the dispositions in the bylaws. However, bylaws are usually made at the very beginning of an association and not touched or updated afterwards. It is very possible that at the time of the foundation of the company there was only one founder and owner, so chances are that the bylaws are not really accurate for the current situation.
For example, according to bylaws, someone having more than 50 percent of the shares can remove the director by ordinary resolution. The shareholders’ agreement can introduce some additional conditions to that.
Some other examples of situations a shareholders’ agreement can solve are that they also may require the acceptance of all the shareholders in order to raise the salary of the director, they clarify what happens when a shareholder dies, or they can rule the conditions of selling shares to third parties.
In summary, shareholders’ agreements can prevent legal battles. Issues will happen anyway, but with a good and clear contract, solutions can be taken straight away.
What Is the Difference Between Bylaws and a Shareholders’ Agreement?
A shareholders’ agreement:
– Is optional
– Goes into detail
-Can be just between some shareholders and not binding to others (those who sign the contract)
– Rules the relationship between shareholders
Bylaws:
– Are mandatory
– Do not usually go into detail
– Usually are binding to all the people in the company
– Rule the actions of the association
Who Are the Parties in a Shareholders’ Agreement?
The answer is each of the shareholders signing the contract. This means that companies and other associations can also be a part of the shareholders’ agreement.
What Happens If You Breach a Shareholders’ Agreement?
As it happens with any other contract, should a shareholder breach the agreement, the others will have a right to claim damages. With that said, the actions done by the one breaking the agreement may be still valid.
Are Shareholders’ Agreements Recommended?
In general, yes, they are recommended. Not only because they can prevent legal battles, but also because they can prevent misunderstandings. Especially when we found companies with family and friends, we tend to think that there will not be issues. However, with money involved, it is a matter of time that issues will arise.
By having a shareholders’ agreement, there are many things that are clear beforehand and prevent different parties from understanding the ownership in different ways.
If you would like further information on Shareholders Agreements, you can download a Free Guide from here. If you require any further information you can contact us and we can point you in the right direction.