Directors govern, shareholders own. However the owners of a company usually want some say in how the company is run. This is doubly true in small businesses like start-ups with a small number of ‘hands-on’ shareholders.
WHAT DOES IT COVER?
A Shareholders Agreement (SHA), as the name suggests, is a contract between a company’s shareholders. These agreements are a flexible way to detail how the company operates and the rights and obligations of shareholders.
For companies with a small number of shareholders a comprehensive SHA acts as insurance against future business hazards. If there is an issue in the future the business can refer to the SHA to see if there is a ready-made solution. SHAs generally protect the interests of minority shareholders. They also govern how dividends are paid and can outline dispute resolution procedures. In this way SHAs safeguard those investing in new businesses. This may encourage further investment and new shareholders as it affords potential investors peace of mind.
WHY IS THIS IMPORTANT?
It is a good idea for startups and new ventures to have a Shareholders Agreement put in place. This is especially true for small companies with relatively few shareholders, largely due to a SHA being more easily amended and revised than a Company Constitution. The result is more flexibility (and security) for shareholders.