Shareholder Agreements – Why have one?

Anticipation and excitement is in the air; a new venture has been thought up with friends over a nice bottle of wine. Each new friend/partner involved is chomping at the bit to bring this new idea to market. Talks of marketing, raising capital, and business markets you will service dominate the conversation – everyone is excited. The next day you run it by your friend, a lawyer, and the music grinds to a halt. They interject a sobering taste of reality that brings you down from cloud nine and explain that there is more to business than meets the eye.

Why are Shareholder agreements important?

Shareholder agreements amongst partners and business owners are essential in delivering the intersection point between financial planning and the legal documentation of a mutual business agreement. The agreement outlines the rights and obligations of each shareholder, clarifies the management structure of the company, and sets out procedures for decision-making and dispute resolution – PRIOR TO PROBLEMS ARISING. It lays the foundation and allows for changes to be made in the future as the business evolves.

Essential areas of a shareholder agreement

These essential areas of a shareholder agreement are crucial for the long-term success of any company.

How shares will be owned

The first fundamental element of a shareholder agreement outlines how the shares of the company will be owned and transferred between shareholders. It also allows the shareholders to have control over who owns the shares of the company, protecting the organization from outside interference.

Disability of a shareholder

If a shareholder were to become permanently disabled or unable to do the substantial duties of their job, it is important to outline what happens to that partner. Are they forced to be bought out? Are they still entitled to company profits based on share ownership? These are areas that need to be discussed when going into business with other partners and structured within your agreement.

Death of a shareholder

The death of a shareholder may cause the surviving shareholders to be in an unforeseen business relationship with a business partner they never envisioned or planned. The agreement can provide instruction regarding what happens in the event of the death of a shareholder. For example, will the surviving spouse be bought out of the shares or step in and participate in the business?

Dispute Resolution

A key element of a shareholder agreement is how disputes and disagreements will be resolved between the shareholders. A well-written shareholder agreement should also include procedures for resolving conflicts to ensure all shareholders’ interests are protected despite not being on the same page.

Payout of Profits

Finally, a shareholder agreement should set out the rights of each shareholder, including the right to dividends, voting rights, and access to financial information.

A shareholder agreement is essential for any company with multiple shareholders. It clarifies the management structure of the company and sets out procedures for decision-making, dispute resolution, and ownership of shares. By defining the rights and obligations, a shareholder agreement creates a clear framework for how the company’s operations will be carried out, ensuring its long-term success.

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Watch the Video

In this months Money Minute Mike Erickson and Julia Friesen discuss Shareholder agreements.

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