According to a CB Insights report, about 13% of young projects fail due to stockholders’ conflicts. Most scandals arise because there is no precise protocol to resolve disputes. Shareholders’ agreements are explicitly created to solve all problems peacefully. Let’s discuss who needs this document and its role in the investing environment.
The understanding of shareholders’ agreement
A shareholders agreement is a private document that specifies the rights and obligations of stockholders at the time of its conclusion. It protects businesses and security holders. It is helpful for minority shareholders who do not sufficiently influence the company’s development. The contract also regulates methods of selling shares and making decisions.
It is better to draw up an agreement when opening an organization or before the first issue. This way, stockholders understand why they need to invest and what they will get. If investors cannot resolve problems contentious per the terms of the shareholder’s agreement, they may need to consider changing the interaction format.
Stockholders can postpone drawing up an agreement until later, but the risk of disagreements regarding the vector of the company’s activities increases.
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Who needs to have a shareholders’ agreement?
If you plan to start an organization and receive funding from different people, the shareholder’s contract is one of the most important documents. Such a contract must be drawn up and signed immediately after the registration of a legal entity to avoid problems and confusion in the future.
Whether you plan to receive funds from many investors or from a few people, a shareholders’ agreement is necessary. It must be used even if you receive capital from relatives and friends.
You can hope to avoid conflicts and other problems by starting a business with loved ones. In any case, the shareholders’ agreement will protect the rights and interests of all participants. The document allows for quickly and efficiently resolving any disputes if they suddenly arise.
The main chapters of the document
The shareholders’ agreement guarantees fairness for every shareholder of securities and protects his rights. The contract includes provisions where securities’ fair and legal value is indicated (this is relevant if they are sold). It allows management to make an informed decision about attracting additional shareholders and creates guarantees for minority partners.
Such a contract contains the following sections:
- date of signing the document,
- the volume of issued securities,
- capitalization table, where there is a list of shareholders and the size of their shares,
- various restrictions on the transfer of securities to third parties,
- the pre-emptive right of shareholders to purchase shares to maintain the size of their share in the event of an additional issue,
- payment algorithm in case of liquidation of the company, etc.
Sometimes people think that the stockholders’ agreement repeats the company’s articles of association, but it is not. Bylaws are based on incorporation articles, allowing for managing the organization’s activities. At the same time, the shareholders’ agreement is not a binding paper. Such a document is created for stockholders to understand their rights and obligations.
Pros and cons of shareholders’ agreement
Stockholders’ agreements are often used as a guarantee or protection for stockholders as they, among other provisions, often explain the course of action if something goes wrong. Without such a contract, disputes and disagreements cannot be avoided. Let’s discuss other benefits of drafting and signing a shareholders agreement:
- Privacy: unlike articles of association, according to the law, agreements do not need to be approved by the Companies House. Thus, the corporation may not disclose its internal activities.
- Dividend policy: if you specify in the shareholder’s agreement how every stockholder will profit from the business, this will avoid disputes in the annual distribution of profits.
- Simplify interaction with creditors: many creditors prefer companies with shareholders’ agreements, as they often contain tools to interact with creditors.
But do not forget about some of the downsides of the contract:
- Reduced flexibility: the presence of the document regulating the relationship between stockholders and the company makes the organization’s management less flexible.
- Difficulties in making changes: to make adjustments to such a document, the consent of all stockholders is required. At the same time, changing articles is enough for 75% of investors to vote in favor.
In an era of commercial instability, which often causes disputes, it is essential to have a clear and understandable procedure to resolve conflict situations. The complexity of the shareholders’ agreement grows with the organization; if you only plan to register a company, then the first contract will be simple. You can find a template for shareholders agreement on the Internet, but we strongly advise you to interact with a lawyer who can tailor the contract to your situation.