Safeguarding Business Stability and Preventing Disputes
Could a single disagreement between shareholders put your business at risk? Without a clear and comprehensive shareholder agreement, minor misunderstandings can threaten the stability of a business. This article will set out how you can safeguard your business with a shareholder agreement that prevents disputes before they start.
A robust shareholder agreement is more than a mere formality, it is a strategic tool for risk management, conflict prevention, and business continuity. Clear documentation of governance and operational mechanisms ensures that all parties understand their rights, obligations, and pathways for resolution if disputes arise.
Elements to include in your shareholder agreement
Director Appointment and Nomination Rights
A fundamental point of contention in many shareholder disputes is the right to appoint or remove directors.
- Specify which shareholders or classes of shares have the authority to nominate or remove directors.
- Outline the process for selecting the board chair.
- Clarify whether shareholders have the right to become directors.
Decision-Making
Clarity regarding which decisions are reserved for the board and which may be delegated to management is essential.
- Set out the process for delegating authority, the scope of delegated powers, and any limits or oversight mechanisms.
- State which decisions require a simple majority, special majority, or unanimous consent.
- Detail the frequency of board meetings, quorum requirements, and voting procedures.
Banking and Financial Authority
Agreements should detail banking signatory rights, set financial thresholds for board or shareholder approval, and define processes for managing company funds.
Information Access for Shareholders
Shareholders are entitled to timely and accurate information about the company’s performance, yet access may be restricted for competitive or confidentiality reasons.
- Establish what information will be provided to shareholders.
- Outline what the frequency and format of reports will be.
- Note any limitations on access to information.
Annual Budget and Business Plan
- Define the process for approving annual budgets and business plans.
- Set thresholds for approval and outline the consequences of deadlocks.
Share Transfers
- Specify how shares are valued and the process for approving third-party transfers.
- Consider how shares will be dealt with upon events that trigger transfers, such as death, insolvency, or end of employment.
Encumbrance of Shares
To prevent destabilizing the company’s ownership structure, agreements typically prohibit shareholders from pledging or encumbering their shares without consent.
- Determine the circumstances in which shareholders can encumber their shares with consent.
- Set clear rules to avoid unintended consequences from personal financial arrangements.
Funds and Shareholder Loans
Shareholder agreements should address potential obligations on shareholders to provide funding.
- Specify the terms of such loans.
- Outline whether funding from shareholders will be sought before or after seeking external capital funding.
Remuneration and Dividends
- Establish how directors’ compensation will be determined.
- State the process for declaring and distributing dividends.
Employment and Non-Compete Provisions
Where shareholders are also employees:
- Determine if each shareholder will have an employment agreement.
- Clarify how termination of employment affects shareholding.
- Decide if non-compete clauses will be included in shareholder employment agreements.
Dispute Resolution Process
A well-designed dispute resolution framework is essential to ensure that disputes are resolved efficiently.
- Include a clear dispute resolution framework, such as mediation or arbitration.
- Provide pathways and timelines for dispute resolution.
Fundamentally, the complexity of shareholder relationships underscores the need for comprehensive and clear agreements. By addressing the matters listed above, businesses can significantly reduce the risk of disputes and ensure their long-term stability.
Contact Aptum for tailored and considered guidance when preparing your shareholder agreement.
FAQs
1. What is the purpose of a shareholder agreement?
A shareholder agreement sets out the rules for ownership, decision-making, and dispute resolution, helping prevent misunderstandings that could disrupt the business.
2. Do all companies need a shareholder agreement?
While not legally required, any company with more than one shareholder should have one to protect both the business and the owners.
3. What happens if shareholders disagree on major decisions?
A shareholder agreement outlines voting rules, reserved matters, and dispute resolution processes to manage disagreements before they escalate.
4. How are shares valued during transfers or exit events?
The agreement typically includes a valuation method—such as independent valuation or set formulas—to ensure fairness during share transfers.
5. Can a shareholder be forced to sell their shares?
Yes, certain trigger events such as misconduct, bankruptcy, or termination of employment may require a shareholder to transfer their shares, depending on the agreement.
