1. They minimise the risk of shareholder disputes
The best thing about a Shareholders Agreement are the discussions had in preparing a Shareholders Agreement. Shareholders take future concerns into account and foresee them during the drafting process of a shareholders' agreement. By raising important issues up proactively, such which shareholder, if any, should have a casting vote, or how much a director can spend without shareholder approval, each of these scenarios can be addressed in a shareholders agreement mitigating expensive litigation costs in the event of a dispute.
2. They outline a clear procedure for dispute resolution
Regardless of how thorough your shareholders’ agreement was drafted, disagreements can still occur between the shareholders. This is when it is great to have a process outlined in the agreement to protect all parties and the interests of the company. Since the shareholders have already agreed to the dispute resolution process in the agreement, when a dispute arises there are clear steps to follow to attempt to resolve the dispute commercially and pragmatically in an attempt to avoid the matter becoming litigious.
3. They provide a clearer understanding of the company for future investors
A shareholders agreement is an opportunity to document mechanisms for the sale or issue of shares. Not only is this helpful for the original shareholders to understand how shares can be sold, and ensuring minority shareholders would not jeopardize a potential acquisition of the company, it also provides comfort to incoming shareholders in terms of whether new shares can be issued which would effectively reduce the shareholders equity position.
Investors or potential purchasers of a company will wish to understand the mechanisms, rules, rights, and responsibilities that apply to shareholders and how they are expected to conduct themselves as members of the company.
Mechanisms, rules, and responsibilities that are applicable to shareholders and their conduct should be outlined in the shareholders agreement. This is particularly helpful where a Shareholder may be operating in breach of their responsibilities or duties which may trigger a ‘bad leaver’ or forced sale of the breaching shareholder’s shares, for a reduced sum.
4. They demonstrate business experience
A shareholders agreement demonstrates to others (particularly investors) that your company is organised, reliable, professional, and values legal protection. A company that operates a business with multiple owners (multiple shareholders) is generally expected to have a shareholders agreement.
5. They safeguard the rights of the original shareholders
As a founder of a business, you’re usually looking to protect your initial capital and sweat equity invested. A shareholders’ agreement will allow you to ensure that founding shareholders maintain the desired level of control (and reward) in the company moving forward.
As a business owner, you will want to ensure that you safeguard the money you provided initially, and the equity accrued. By establishing a shareholders’ agreement, the initial shareholders have the ability to retain the desired amount of control in the business.
