Small Business - Shareholders’ Agreement

If you own a small business with two or more shareholders it is important that you have a shareholders’ agreement in place.  Whilst it is not a legal requirement to do so, not having one could spell trouble in future.

A shareholders’ agreement governs the way business between shareholders is conducted and can provide direction and stability.  It implies that the shareholders have mechanisms in place to deal with future events and/or disputes and particularly how an individual’s share will be purchased following the event, for example if the person goes bankrupt or has a long-term illness.  The agreement sets out how the shares are valued, who they can be purchased by, whether they are paid for outright or on a deferred basis and other provisions.

Without a shareholders’ agreement, in the event of a death of a shareholder the shares are usually treated as part of the person’s estate and go to their beneficiaries.  Also if a shareholder chooses to leave the company the ongoing shareholder(s) may wish to apply restrictions on the exiting shareholder’s ability to start a competitive business.  In both cases a shareholders’ agreement could prove invaluable in protecting the interests of the company.



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REF: MC/NL/1.1