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The Importance of Shareholder Agreements

When you are entering into a new venture the opportunities seem endless and everyone is positive about goals and working relationships. However, as we unfortunately see so often in our litigation team, things do not always go to plan. A well drafted shareholder agreement can be worth its weight in gold when working relationships sour.

A shareholders’ agreement should be drafted and agreed to at the outset of a new business relationship.  All parties should  clearly understand  and be happy with  the terms on which they  enter and exit the company  and how the business will operate. A well considered agreement should reduce the risk of a costly dispute resolution process.

An agreement should cover:

  • Funding arrangements – including initial contributions, capital raising, the terms on which any advances are to be repaid and dividend agreements
  • Guarantee requirements
  • Director appointments and removals
  • Share valuations, transfers and the process when shares are to be sold, including pre-emptive rights
  • Voting rights, authorisation levels and major transaction approvals
  • Dispute resolution clauses
  • Insurance requirements
  • An exit strategy, included forced exit for certain events
  • Loyalty and non-compete clauses
  • Restraints of trade following exit

Every agreement will need to be tailored to the particular business operation and the circumstances of the shareholders. We recommend that you meet with your lawyer and accountant at the outset to draft the agreement that works best for you and your business.  If you are already in a business, it is not too late to put an agreement in place if you can reach agreement with the other shareholders as to the terms.

If you do start to have issues in your business we recommend that you try to resolve these as soon as possible.  A good shareholder agreement can be used as a road map for dispute resolution and can assist with the resolution of  issues between the parties. .  So often we have business owners coming to see us who either have no agreement or a generic agreement that does not work for their business.  If the relationship is beyond repair at that stage, the only option is usually a protracted, expensive dispute that is not in the interest of any of the shareholders or the business.

If you do need advice on shareholder agreements please contact Jake Casey or Chris Marr.  If you have a dispute that you need assistance with please contact Sarah Rawcliffe or Jessica Gilby-Todd.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

Sarah Rawcliffe - Harkness Henry Partner

Sarah Rawcliffe

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