Shareholders Agreement - Essential for Family Businesses

Many privately owned companies are started by family members and friends coming together perhaps to develop a great business idea they have devised.  They can spend much time and effort in building up a successful company which they risk jeopardising because they have no shareholders’ agreement in place which can assist in the face of problems arising. Examples include:

• Differences in opinions arising over time – the shareholders start off thinking they have common goals and ideas as to how to achieve them but those views can diverge over time. One may wish to re-invest profits and grow the business while others may wish to reap the rewards more immediately by declaring dividends or paying bonuses.
• Shareholders falling out – common sense and tolerance may not be enough to end a dispute where specific action is called for.
• If a shareholder dies or is divorced – a shareholder’s spouse may take his/her place. Is this what the remaining shareholders want? In the case of a shareholder getting divorced, would they wish a former spouse to join the board, who may well be hostile?
• Selling shares – without regulation, a shareholder might be able to sell his shares to anyone they like. Is this what all shareholders want?

A problem among the shareholders could damage the company as it could affect the running of the company so long as the problem is left unresolved. A shareholders’ agreement can provide clear instructions to all shareholders on how certain matters should be dealt with. For example:

• Allowing the other shareholders to have first right of refusal to purchase an outgoing shareholder’s shares, determining the fair value and in what circumstances the shares may be sold to a third party.
• Regulating who should be entitled to become a director.
• Establishing how the company’s profits should be used.
• Providing a structure which can assist the parties to achieve effective resolutions of a dispute.

A shareholders’ agreement is therefore a vital tool to privately owned companies. It not only safeguards against damage to the company by having procedures in place to deal with any problems quickly, and it also helps to avoid putting a strain on personal relationships perhaps between family members involved as well.