WHY YOU NEED A SHAREHOLDERS AGREEMENT

Dear Subscriber,

You and your partners have finally incorporated a Company and put up a website to actualize the dream project you have been discussing for months. Your partners are great guys some of whom you might have known since secondary school and everything feels great as customers start patronizing your service. Two years down the line the bubble has burst and partners are at daggers drawn over various issues bordering on the management of the Company.

This surely is a familiar pattern and it is most likely because the relationship was not properly defined at inception. A Limited Liability Company comprised of various stakeholders with no Shareholders Agreement can be likened to a Country without a Constitution and proper legal system for enforcement of order with the resultant effect being chaos and unrest.

It is advisable for every Company with more than one stakeholder to have a Shareholder agreement that ensures that the running of the company and the responsibilities of the shareholders are properly documented with clarity and certainty as to what can or cannot be done and how decisions will be taken. The effect of this document is that it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably. This week we highlight six (6) reasons you need a Shareholders Agreement.

#1 Having a shareholders agreement is a cheap way to minimize business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.

#2 In a situation where there is a change in the circumstance of any partner it will limit the effect on the business. The agreement safeguards the interests of all shareholders and the interests of the shareholders’ families in the event of the death or insolvency of a shareholder

#3 The existence of a shareholder agreement can assist in raising finance from Creditors because it demonstrates the stability of the business.

#4 A shareholders agreement can protect the rights of minority shareholders and limit the tyranny of the majority. It can also allow for the process for amicably dissolving the union in the event things can no longer work amongst the partners.

#5 A Shareholders agreement can restrict how shares are sold by any of the partners to avoid shares ending up in the hands of people who might not share your opinion on running the Company.

#6 A Shareholders Agreement allows you to assign different rights to different share classes, meaning you keep control of your company even if your ownership is reduced to a minority.

Having a well thought-out and carefully drafted shareholders agreement will allow you and your team focus on growing the Company for profit and because shareholder agreements are fairly serious legal documents,  it’s advisable to consult a professional who can guide you through the process.

The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters covered in this article please contact info@ioclaw.com