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Shareholders’ Agreement – Why they are essential

Updated: Apr 26, 2021

When a company has more than one shareholder, a shareholder agreement is an essential document to avoid costly legal issues among the business owners. A shareholder agreement sets expectations amongst the owners with respect to the day-to-day operations of a company as well as planning for an exit strategies for voluntary and involuntary or unexpected events such as death and disability.

Shareholder agreements typically address how the company’s management and who will make the major decisions for a company. Shareholder agreements also detail company financing including shareholder loans and requirements for providing personal guarantees to lenders. Restrictions around share transfers are common in closely held companies, and in particular establishing rights of first refusal amongst the shareholders.

If the owners end up not getting along, a shareholder agreement may include a number of different strategies for ending the business relationship on terms pre-agreed upon, including valuation of the company, timing for buy out, rights of first refusal, and other shareholder rights so that the remaining owner doesn't end up with a new business partner without any say over the situation.

Exit strategies for unexpected events such as death and disability are highly recommended so that the shareholders, and their families, have a clear path as to what happens to a departing shareholder's shares and the method of valuation for the shares held by the deceased or disabled shareholder, as well as timing of payment for the departing shareholder's interest in the business.

A shareholder agreement prepared at the early stages of a business venture can encourage discussion of the goals and objectives of a company and its owners that may not have otherwise been considered until it is too late to have a meaningful conversation. Although it may seem an unnecessary cost when starting up a business, budgeting for a shareholder agreement is a well advised expense that could not only save tens of thousands of dollars in long run but also help to preserve relationships by avoiding misunderstandings.

If you would like to explore how a shareholder agreement would benefit your business please schedule a free discovery call with Dawn.

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