Moving Light Moving Light

Resources Five Reasons Why Shareholders’ Agreements are Essential for Business Owners

  • Posted by Insight by Emily O’Brien
  • Published Current as at 28 July 2023
  • Category Insights

Addressing the governance issues of a company amongst business owners is a critical conversation to have early in the business journey, particularly while relationships are positive and owners can reasonably discuss the rights, obligations and relationships that affect them. If such matters are not addressed before issues begin to arise, discussions can become much more complicated.

Not only is it important to have these conversations early, but it is essential to then document the outcomes. This documentation may take the form of a Shareholders’ Agreement, Unitholders’ Agreement or a Buy Sell Agreement, depending on the structure of the business and the issues that the business owners need addressed. An experienced commercial lawyer can help determine the best governance documentation for your business.

Here are five reasons why it is important to address governance related issues in a Shareholders’ Agreement (or similar documentation) early in a business:

1. Protecting Owner Rights

    An agreement safeguards the rights and interests of business owners by establishing clear rules and procedures. It can cover topics such as voting rights, ownership transfers, dividend policies and decision-making processes. This ensures fair treatment and may include processes to aid in resolving disputes.

    2. Resolving Disputes

    In the event of conflicts or disagreements among business owners, a well-drafted agreement will provide mechanisms for dispute resolution. It will outline procedures for mediation, arbitration, or other methods to resolve conflicts without necessarily resorting to costly litigation.

    3. Controlling Ownership and Transfer of Ownership

    An agreement will govern how owners are brought into and exited from the business. It can include provisions for pre-emptive rights, restrictions on a transfer of ownership and the approval processes, enabling certain owners to maintain control of the business and prevent undesirable parties from acquiring shares.

    4. Confidentiality and Non-Competition

    Well-drafted agreements should include confidentiality provisions, ensuring that sensitive information remains protected. Additionally, they can address non-competition clauses and non-solicitation clauses, preventing exiting owners from engaging in competing activities that could harm the interests of the business, or from encouraging staff, clients or suppliers to stop engaging with the business.

    5. Planning for Succession and Exit Strategies

    Documentation should address matters related to succession planning and exit strategies, outlining procedures for the transfer of ownership upon death, disability, or retirement of a business owner, ensuring a smooth transition and minimising disruptions.

    By having these proactive discussions, documenting the outcomes, and establishing clear guidelines and procedures, it promotes transparency, minimises conflicts, and protects the interests of all business owners. This in turn contributes to the stability and long-lasting success of the business.

    Contact our commercial lawyers to start the conversation about your business’s governance and documentation such as Shareholders’ Agreement, Unitholders’ Agreement or Buy Sell Agreements.