Why may you need a Shareholder Agreement? The benefit of a shareholder's agreement is it prompts the shareholders into considering areas of possible future dispute, and agreeing in advance how to resolve them; sets out the agreement so that there is in fact no dispute. Points of advice:
1. Causes of disputes
Between individuals even when they have the same apparent interest; Between director shareholders and other shareholders; Between majority and minority shareholders; Between shareholders owning different classes of shares. Family disputes Shareholder's agreements are particularly important in family companies. Relatives can be more trusting at the outset, and therefore give less consideration to possible problems. There is therefore much more scope for disagreement because so few areas have been thoroughly addressed. Exit strategy What happens when someone wants to sell his shares? Does he have to sell to existing shareholders? If so, at what price? If he is able to sell to an outsider, what are the terms of that prospective sale? What will be the rights of the outsider? What is a fair valuation? If he is not allowed to sell to an outsider, what happens if the existing shareholders simply do not have the money to buy at a fair valuation? New people in If the company's business expands and succeeds then new people will be required. How will they be given shares, if at all? To what extent will their remuneration package affect some shareholders more than others? Policy and destiny Who controls the future direction of the company? To what extent do minority, or non-director shareholders have a right to become involved in major decisions? What constitutes a major decision? We are all equal What happens when two or more people owning the shares equally cannot agree? Stalemate and bloody mindedness may cause a complete collapse in the value of the company for both of them. What provisions should they have made to avoid this scenario?
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Security for borrowing Suppose everything is well worked out as between the shareholders, but the time comes when the company needs to borrow a substantial amount of money? The bank will provide the essential lending only with the personal guarantee of one particular shareholder - possibly even a shareholder who is not a director. If that shareholder agrees, then his risk profile is changed completely.
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Who is to be a director? What directors are needed?
What will be their qualification? Should they be found from among the shareholders? How much will they be paid? The list of possibilities for dispute is endless. A good shareholder's agreement will minimise future problems. These notes and the Shareholders Agreement do not intend to cover ALL areas of disputes that may arise.