WHAT IS A SHAREHOLDERS’ AGREEMENT & WHY YOU NEED ONE

This guide will inform you of the key benefits and reasons for implementing a shareholders’ agreement within your organization. Even if you have a new company with fewer staff, or there’s just two of you working together, having an agreement in place will prevent potential complications further down the line.

A shareholders’ agreement is a formal arrangement established between the company’s shareholders, governing their relationship with one another. The purpose of having an agreement in place is essentially to protect the shareholders who have invested in the company and to safeguard the organization. Without it, disputes between shareholders have the potential to grind the company to a halt.

The agreement will include explicit information which will be valuable for all shareholders, both minority and majority shareholders. A mutual relationship between all parties is established because the agreement states that the rules which are needed when running a company; this applies to small organizations as well as bigger corporations. So, if you are setting up a business with family or friends, and differences arise, you will all be protected by the rules agreed upon.

Broadly speaking, shareholders’ agreements lay down the way in which business will be conducted and how any issues will be resolved.

The main reason for putting a shareholders’ in place, is to protect the shareholders and the company. For example, if you don’t have an agreement in place, the majority of shareholders are able to make important decisions that are not necessarily in the best interest of minority shareholders. Decisions that should include everyone might be about the appointment or removal of directors, issuing of new shares, etc

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Another advantage of having the agreement is the flexibility is offers in comparison to the basic constitution, as no standard form exists for shareholders’ agreements. Furthermore, because it is a private document, commercially sensitive information can be included. 

Although the company’s constitution (memorandum and articles of association) can serve as the foundations, a shareholders’ agreement provides further reassurance that everyone is on the same page and enables problems to be nipped in the bud, generally saving time and money in the long run.

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