Why do I need a Shareholders Agreement?

If you set up a company with more than one owner, or if you have a company that may be owned by just one person, but you’re thinking of bringing someone else in as a ‘partner’, then you need to consider putting a shareholders agreement in place.

In the beginning, when a company is formed, there is often a lot of enthusiasm and goodwill between partners to make the business work. But things can change over time, and there can be a lot of reasons why former ‘best friends’ can fall out, and start to disagree about the direction the business is taking. Unfortunately, in some cases, this can even lead to them becoming the worst of enemies.

So, it’s important to set out the right and obligations of both the parties in a shareholders agreement to avoid problems further down the line. A shareholders agreement will usually cover matters like:

• control of the company (who is allowed to make what decisions);

• what happens if you want to issue new shares (including whether you first have to offer them to existing shareholders); and

• other matters to protect the value and assets of the company.

Broadly speaking, there are two types of a shareholders agreement. The first is a ‘50-50’ shareholders agreement, where two people own and operate the company jointly, in equal shares. Next, there’s a type of shareholders agreement where one party is in the majority.

In the case of a 50-50 shareholders agreement, it’s important to ensure that there are deadlock resolution provisions in place because all decisions have to be agreed by both parties. If the partners can’t agree, for any reason at all, the business can become deadlocked – effectively paralyzing it, and preventing it from operating efficiently or moving forward.

(See our post on how to resolve a shareholder deadlock, HERE.)

In the case where a company is owned by a majority shareholder, terms are still required, but for different reasons. Putting a shareholders agreement in place will ensure that the majority shareholder isn’t prevented by the minority from operating the business, but it will also ensure that the minority shareholders are protected from any abuse of power.

So anyway the ownership pie is sliced, having a good shareholders agreement makes sound business sense for all the parties involved.