Last Updated on December 18, 2022 by Anda Malescu
When starting a company with more than one shareholder, it is advisable to execute a shareholders’ agreement in order to establish some ground rules about the business operation and the relationship between shareholders. Nevertheless, shareholders are not required to have a shareholders’ agreement in place when setting up a company, but instead they have the option to have one if they decide so.
Therefore, the question remains as to why should I have a shareholders’ agreement? While drafting a shareholders’ agreement can be costly sometimes, it is recommended to have a written agreement for several reasons discussed below.
First, at the beginning of a business relation, partners cannot easily foresee potential conflicts
They are not usually capable to predict future problems or other circumstances that can cause them to fall out or put them in difficult positions regarding the decision-making process in the company. Disagreements can occur in any kind of relationship, especially in business relationships where money is involved. When partners have a problem, it is normally more difficult to find a solution that is fair to everyone. Therefore, it is easier to formalize an approach that sets out the rules to be followed when difficult circumstances arise.
If partners choose not to draft a shareholders’ agreement that can cope with potential problems, they might face bigger risks such us losing the partnership or losing trust in each other.
The shareholders’ agreement governs the operation of the company and employment issues
This contract can regulate among others, how the board of directors makes decisions, the number, power and duties of the board of directors and how shareholders can become directors or officers in the company.
By drafting a shareholders’ agreement, shareholders establish an equitable relation and therefore protect either the minority shareholders or the majority shareholders. For instance, the agreement can contain clauses that provides for the ability of the company to issue additional shares, decisions that can be made either unanimously or by majority vote. The agreement can also contain “tag-along/drag-along” clauses.
A shareholders’ agreement can establish a mechanism that regulates the transfer of shares
For instance, the agreement can provide a mechanism that establishes priority for the existing shareholders when other shareholders want to sell their shares. This mechanism is often called the “right of first refusal”.
Fifth, the shareholders’ agreement comes in handy when one of the shareholders wants to exit the company. The remaining shareholders can ask the exiting shareholder not to work in a competing business. This kind of restriction can be very limiting to the shareholder exiting the company but protects the company and its interests.
Lastly, if disputes occur, the shareholders’ agreement can set in place a dispute resolution clause. This may include referral to mediation, or to arbitration.
In conclusion, there are multiple answers to the question “Why should I have a shareholders agreement?”. Aside from the specific points above, a shareholders’ agreement can also signal business stability. And, by showing business stability, the company presents itself more valuable to future investors and partners.
Our business lawyers in Miami, Florida USA can successfully plan and prepare shareholders’ agreements, and help you understand why you should have a shareholders’ agreement. Contact us or schedule a consultation with your business attorney in Miami, Florida USA to help you plan and execute a shareholders’ agreement.
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