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Why bother with a shareholders' agreement?

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Whether you are starting a new business venture, or if you have an existing business and simply never got around to it, the importance of having a shareholders’ agreement in place cannot be understated.

What is a shareholders’ agreement?

A clear and considered shareholders’ agreement will encompass the various rights and obligations imposed on shareholders, and provide the opportunity to implement share structures with different classes of rights depending upon the desires of the individual investor and the functioning of the business.

Why should I have one?

Creating a shareholders’ agreement provides an opportunity for shareholders of a company to predetermine solutions to potential future problems. Both new and existing business partners are often of the view that turning their attention to how they might resolve a potential dispute signals distrust and pessimism on their part. In fact, the opposite is true. If a business is going to be able to operate successfully, then confidence and certainty as to the relationship between business partners is the best foundation. It can be used to determine how the business should operate, and how any deadlocks can be resolved. Beyond this, it can function as insurance against potentially acrimonious shareholder disputes, which can in turn lead to legal fees, all of which might have been avoided or at the very least mitigated.

Having a shareholders’ agreement is in the interests of both minority and majority shareholders, being able to provide protection for both. In the absence of an agreement, a minority shareholder may feel in a vulnerable position. A shareholders’ agreement could therefore protect against a dilution of their interest in the company by requiring the consent of each shareholder in order to issue new shares. Equally, a majority shareholder might be concerned about their potential for selling the business in the future, so may wish to use a Drag-Along clause to require the compulsory sale of minority shareholdings.

The Company and Commercial department at BakerLaw are able to offer a wealth of experience advising owner/managers and SMEs, and understand the vital role that a shareholders’ agreement can play in the future of your business.

If you are considering setting up a new business or would like to discuss creating a shareholders’ agreement for an existing business, please contact Simon Porter in BakerLaw’s Corporate & Commercial department at simon.porter@baker-law.co.uk or call 01252 730754 to discuss further.

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