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Shareholder Agreements

When forming a business most people do not go to the trouble of drawing up a formal shareholder agreement – many thinking that it is not necessary.

However, in circumstances where shares are held by different parties we would recommend that clients give this subject some careful thought and consider entering a formal shareholders’ agreement and taking appropriate life insurance – let me briefly explain why:

A shareholder agreement, in addition to covering various detailed statutory matters such as voting rights and the decision making process, can cover methods of financing used by the business, the obligations of director / shareholders and perhaps most importantly, provision for dispute resolution and exit strategies.

Let’s consider an example of a small family company managed by two married brothers who both work in the business, each having an equal shareholding with a good personal and business relationship and no business issues - circumstances under which many people would believe a shareholder agreement is not necessary.

In this example, if one of the brothers died, his shares would usually pass to his spouse, meaning that the surviving brother would have a 50% equity owner who had no involvement in the business and who might want to release their capital quickly – a recipe for potential conflict if the expectations of the parties involved differ.

In these circumstances, a shareholder agreement might stipulate a method of valuing the shares and include a “purchase” clause entitling / enforcing the surviving shareholder to buy the deceased shares using the proceeds of the life insurance. This would enable the widow to realise her investment and the surviving brother to secure control of the business.
 

 

 

Date: 11th February, 2009
Author: Gary Farnes

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