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Why a business needs shareholders' agreements
Often when going into business the last thing that people think about is regulating the relationship between themselves. Invariably, the parties start out as friends, focused on the success of the company and not how their relationship should be managed.
Unfortunately, many limited companies are simply incorporated with model articles, a basic set of rules which do not provide any assistance on how to deal with disputes or provide necessary protections to shareholders. At the outset, often, little consideration is given to exit strategies, how disputes may be resolved and possible tax planning.
So, how can you plan for the future and protect your position as a shareholder? A good place to start is by having a shareholders’ agreement drafted. They can provide clarity for shareholders and set out such things as:
- Who should have a right to be a director;
- To whom shares can be transferred and in what circumstances;
- Limits on spending by the company without shareholder approval;
- What will happen in the event of a dispute;
- A dividend policy; and
- Cross option agreements.
Cross options can be a really good way to secure the future ownership of a company in the event of death of one of the shareholders. The proceeds of life policies taken out by the shareholders can be used to purchase the deceased’s shares. This provides the deceased’s family with an appropriate payment for the shares and allows the surviving shareholders to continue to run the company.
Shareholders’ agreements can be tailored to the specific circumstances and concerns of shareholders. Whilst it is beneficial to draft a shareholders’ agreement when a company is incorporated, it is never too late, and even if one is agreed, it should be reviewed to ensure it still reflects the parties wishes.
Birkett Long has vast experience in drafting shareholders’ agreements and would be pleased to discuss your specific requirements.
If you would like to discuss this matter further, or phone me for a free 15 minute chat on 01206 217366 or alternatively email me at firstname.lastname@example.org.