5 Benefits Of Having Shareholder Agreements
A report by CB Insights concluded that 13% young businesses fail due to disharmony or conflicts between their shareholders. Most of these conflicts arise either due to the lack of a clear protocol or due to the absence of a strategy for dispute resolution.
Shareholders’ agreements are specifically designed to avoid or resolve these problems amicably. A shareholders’ agreement is a contract signed between the investors of the company. Although each contract is drafted differently for diverse organisations, this agreement is responsible for structuring the relationship between its shareholders.
Here’s a closer look at the advantages of shareholders’ agreements:
Most shareholders’ agreements are written in concurrence with a company’s by-laws and its articles of incorporation. Hence, these agreements not only establish the structure and norms of the shareholders but also define the key management of the company, its board of directors and their operations. This provides an additional provision for the organisation to rely on.
Unlike articles of incorporation, these agreements are confidential and inaccessible to creditors or non-members. Hence, they also make sure your company’s private information stays private.
2) Dispute Resolution
Well drafted shareholders’ agreements provide an optimum way for the shareholders to resolve their conflicts. According to a report by Funders and Founders, 62% of all start-ups in Canada dissolve due to disagreements between their co-founders or partners.
Consulting a practised lawyer to draft your shareholders’ agreements helps you mitigate an effective strategy for dispute resolution which is specifically suited to your business. Your corporate lawyer can also provide you counsel regarding the different approaches to Alternate Dispute Resolution and help you reconcile these conflicts effectively.
3) Unanimous Privileges
This is one of the key advantages of shareholders agreements. These agreements help in maintaining accord between the majority and the minority shareholders of your corporation. They also ensure that the majority investors do not abuse their power by defining the key matters in the contract that require unanimous support of the shareholders.
These agreements outline the relationship between different shareholders and define the regulations for adding or removing investors from the corporation. This makes modifying the key management of the organisation flexible and helps in avoiding unnecessary litigation.
Several clauses such as a non-compete contract for a departing shareholder, provisions for dividend distribution can be added to the agreement to make the company more adaptable to future necessities.
5) Transfer restriction
Shareholders’ contracts can also include a shareholder buyout agreement or a buy-sell agreement to limit the transfer of shares between the key members of the organisation. Without these agreements, an exiting shareholder can transfer her shares to any member or non-member without any legal action.
Shareholders agreements define several crucial terms including the acceptance of credit and election of the board of directors for your corporation. Lack of which can lead to heavy litigation for your company. Consult an experienced law firm to learn more about these contracts.