Business

Legal Matters: A generic shareholders' agreement could harm your company

Aleric Turtle and Marie-Anne McVeigh of McCartan Turkington Breen Solicitors.
Glenn Reid

THE importance of a professionally drafted shareholders' agreement that has been tailored to your business cannot be overstated.

Although a business owner might be tempted to cut costs with a template or 'off the shelf' shareholders' agreement they found online, this can, and often does, lead to problems down the line.

This is especially the case should relationships between shareholders break down or if an individual shareholder's priorities change.

A shareholders' agreement is a contract between two or more shareholders in a business.

It obliges each of them to follow certain procedures, make clear how the business could operate and secures their rights as a shareholder.

A quick search on Google will reveal many websites that offer template shareholders' agreements. They may be free or incur a small fee.

However, these templates may not consider the nature of the shareholders' relationships, the nuances of the company and, in some instances, even the legal jurisdiction within which your business operates.

On the contrary, an experienced corporate solicitor will have the expertise to provide you with a shareholders' agreement that you can rely on to perform its function within your company structure.

A solicitor will examine your business and work directly with you to better understand the nature of the shareholders' relationship.

This allows for the creation of a tailored agreement that ensures protection for shareholders. Every business is different and your complex requirements may not be met by a template.

Some business owners might consider a shareholders' agreement to be just another burden of running a business rather than an asset with tangible benefits.

This would explain why so many might lean toward downloading a generic template. This mindset should be shifted quickly if a business is to withstand the test of time.

A shareholders' agreement should be viewed as an asset worth investing in. It's an investment in the future of a business.

Aleric Turtle of McCartan Turkington Breen Solicitors advises that: “Business owners without a carefully drafted shareholders' agreement potentially leave themselves exposed to enormous unnecessary risk. Many businesses, including start-ups and family-owned companies, can benefit from the protections afforded by a shareholders' agreement."

A shareholders' agreement will regulate the relationship between the shareholders both whilst in business together and, importantly, when a shareholder wishes to sell his or her shares.

Provision can be made to ensure that the business is sold in its entirety or that the existing shareholders have the first right of refusal to purchase any sale share.

Without an agreement, shareholders and the company rely on articles of association, existing legislation and common law procedure.

This may expose them to the potential of conflict. Furthermore, a shareholders' agreement is often a requirement of investors and the absence of one might harm your ability to fundraise.

If you are a business owner, are you confident that your shareholders' agreement, or lack of one, will serve you when the boat gets rocked? If not, seek advice from a solicitor.

:: Glenn Reid is a legal marketing specialist and marketing manager of McCartan Turkington Breen Solicitors

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