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Does your Company Need a Shareholder's Agreement?

The short answer is yes! Whether you are a business owner, on the board of directors, or solely a shareholder, a proper shareholder's agreement is a MUST.

Here are a few reasons why:

  1. It sets out and secures your rights as a shareholder: A company's existence does not depend on who the shareholders are. The shareholders' agreement will ensure that your shares remain yours even if you are incapacitated or die. Therefore, you remain entitled to the payment of dividends and can sell your shares irrespective of whether you partake in the company's day-to-day management.

  2. It sets out your rights to manage the company: Suppose you have a falling out with your fellow shareholder or director. In that case, you may have to take legal action to enforce your rights. That can be very expensive. This is why it is so important to have something binding on paper.

  3. It sets out that the value of your shares is determined by rights attached to them: It is imperative to know whether the sale of your shares is valued pro rata to the value of the total company or in terms of a value a willing purchaser would pay for your holding. A formal agreement sets out an entire process upon which shares are valued in case one of the directors wants to sell.

  4. An agreement sets out the process of the sale of shares: A shareholder can typically sell, gift or otherwise transfer his shares to anyone, even competitors. It is, therefore, imperative that a formal agreement is in place that states that the remaining shareholders must have the right of first refusal in respect of the shares for sale to protect the company from unscrupulous third parties.

  5. The agreement sets out key decisions that need special voting arrangements: Such a clause will state what key decisions should be taken by or with the consent of certain named individuals, alternatively a higher than 50% majority.

  6. It sets out what happens in case of a deadlock: The shareholders' agreement can show how deadlocks between 50% shareholders are resolved. Or how the company shall be wound up in case the deadlock cannot be resolved.

  7. It stipulates how Shareholder's Meetings are called and run: The Shareholder's Agreement establishes the regularity and nature of meetings and the proper procedure to call such meetings.

  8. Profit Sharing must be clearly understood: The Shareholders' Agreement must stipulate how the profits are shared between the various shareholders.

  9. The agreement governs how the board of directors are appointed: The agreement also provides the maximum number of directors appointed to the board, the directors' duties, and how they may be removed.

In closing, the benefits of having a shareholder's agreement are:

  • It reduces the risk of potential future disputes between shareholders and directors,

  • It regulates the rights and responsibilities of those concerned in the company,

  • It provides clear guidelines for the alienation of shares,

  • It governs the termination of the agreement and how shareholders and/or directors can be removed.

Maybery Inc can help you set up your business and Shareholder's Agreement. Contact us today


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