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Shareholder AgreementA shareholder agreement is perhaps one of the most important documents a privately owned company can have. Shareholder agreements are so important because they provide a method for:
A shareholder agreement also provides clarity and peace of mind to all shareholders about what can and cannot be done and what happens if there is a dispute if things go wrong. New Companies Newly formed companies often do not worry about having an agreement. Optimism is high and everyone is getting along well. Money can be tight so making formal arrangements is seen as an unnecessary expense. It is only as the company grows and matures that problems can begin. The majority of new companies fail within the first five years and it is at this time when debts and responsibilities come can tear the shareholders apart without a shareholder agreement. Falling Out Disagreements between shareholders cannot always be ended simply and amicably. A shareholder agreement will provide for a structured way for all parties to work within, making the resolution of disputes quicker and more effective. Having an agreed structure often stops conflict before it begins. Death or Divorce of a major shareholder Should a shareholder die then without an agreement in place his/her spouse or other family member could take their place. They probably would not know much about the company and may well cause problems whether intentionally or unintentionally. A shareholder agreement can prevent this by providing a way for shareholders to have a right of first refusal to purchase the deceased's shares. Should a shareholder get divorced then their former spouse may turn up at board meetings and cause problems out of spite. Again a shareholder agreement can prevent this. Sale of Shares Without an agreement then a shareholder may sell their shares to anyone. For example, in the event of a dispute they could sell them to a competitor. Personal financial difficulties may force the sale of the share to the highest bidder. Again, this may not be in the best interests of the company. A shareholder agreement provide a right of first refusal which means that existing shareholders have the right to purchase shares in advance of anyone else. This can be to a set formula or by matching the price of an outside bidder. Controlling Finances and Obligations Did you know that your fellow shareholders are able to enter into contracts and other commitments on behalf of the company without proper consideration to the effects they may have. This could spell disaster for the company and the other shareholders. With a shareholder in place an individually's ability to do this on behalf of the company can be limited to an appropriate level with an agreed procedure for levels of commitment required by the company above this. This will ensure all shareholders' exposure to risk is minimised as people overstepping agreed structures will become personally liable. In practice this part of a shareholder agreement gives confidence to all concerned and makes for good profitable decisions within the business.
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