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Do You Need A Shareholder Agreement For A Start Up?

November 26, 2020 Civil Litigation

Do you need a shareholder agreement for a start up business? This is a question many new shareholders ask themselves when setting up a new business, thinking, mistakenly, that they can simply rely on the articles of association of the company.

However, entering into a shareholders agreement should also be at the forefront of your mind when starting a new company.

The majority shareholders disagreements between shareholders of a company could of been avoided had they decided to enter into a shareholders agreement from the outset.

It is often the case that most companies are set up between friends and family members, in which case people do not consider that they require to protect their interests until it is too late (i.e. a dispute arises).

In smaller companies, it tends to be the case that all the shareholders in the company are also the directors of the company. It is in these circumstances that a shareholders’ agreement is very useful, because all other shareholders in the company can be reassured that their rights are protected.

By having a shareholders’ agreement in place, you are ensuring all remaining shareholders in the company have a say in the decision making process, which affect the company. It is therefore best practice to put a shareholders’ agreement in place at the time the company is formed.

Shareholders agreement

A shareholders’ agreement is an agreement entered into by the shareholders of a company. It can act as a safeguard for shareholders, providing shareholder wishes for what is to happen if things go wrong and if a dispute arises. The shareholder agreements are governed by the law of contract and thus breaches of the agreement will provide a contractual remedy.

Defining shareholder rights and obligations reduces the likelihood of disputes. However, should a dispute arise between existing shareholders’ of a company with one potentially difficult shareholder and there is no shareholder agreement to refer to, the disagreement will fall to be resolved by the articles of association of a company (a constitutional document of a company, which sets out how the company is run). This can become quite complex if there is no clear exit strategy for shareholders.

The agreement can regulate, for example, the ownership of the shares of the company, define the object and scope of the company, the management of the company, and the relationship between the shareholders. Importantly, the shareholders’ agreement will govern how the company is run and will set out the rights and obligations of the shareholders. Similarly, it can dictate how shares are valued, and how they can sell shares.

Tailored shareholders agreements

Each shareholders’ agreement will contain varying provisions, however, typical clauses include the required approval of all shareholders before entering into contracts or raising court proceedings; a clause which deals with what is to happen should a shareholder wish to leave the company; and dispute resolution procedures.  The Shareholders’ agreement will confer rights on the shareholders which would not be enforceable if found in the Articles of Association.

Shareholder agreements are not one-size-fits-all solutions; they’re tailored to suit each company’s unique circumstances, goals, and management structures.

Seeking legal advice to draft a bespoke shareholder agreement is essential and in the best interest

Do startups need a shareholders agreement?

Start-up is an exciting but challenging endeavor. When registering your LLC it may be time to consider the next step of formation if you want to form the shareholder agreement. As a startup with many shareholders it’s important to establish formal shareholder contracts to avoid unexpected issues affecting business operations between shareholders. This agreement will allow shareholders to maintain their confidentiality. The shareholders agreement is a document which describes the protections provided by the company and how they can protect you.

Most shareholders agreements outline decision-making processes, resolve disputes, and clarify shareholders’ rights and responsibilities, ultimately shaping the company’s governance and fostering collaboration. Without a carefully crafted agreement, businesses risk facing conflicts and operational disruptions.

Therefore, investing in legal guidance for a tailored shareholder agreement is crucial to safeguard the company’s interests the success of future growth for your company and to avoid creating more problems than the agreement may actually solve.

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