When you venture into business with a business partner or partners, there is no legal requirement to have a Directors, Partners or Shareholders agreement, however, from our experience it is a highly valuable document that prevents a lot of future issues. Most people acknowledge the importance of a personal Will, and a Shareholders or Partners Agreement should be viewed in the same light. Not having clear agreements upfront can be costly and disruptive to any business.
What is a Director and Shareholder Agreement?
A shareholder’s or director’s agreement is an agreement among company shareholders, directors, or partners which dictates how the business should be operated and outlines the rights and responsibilities of the shareholders/directors. The purpose of the agreement is to protect the interests of the business and to ensure each party is treated fairly.
Why is a Director and Shareholder Agreement so Important?
A director’s or shareholder’s agreement ensures that the responsibilities are clear, which in turn, provides protection for the parties involved and reduces the potential for conflict to occur between them. With clearly defined roles and responsibilities, the agreement also ensures that the business runs smoothly as it sets out the ground rules. Such an agreement is helpful to have in case of many possibilities that may arise such as a dispute, death or resignation, to name a few. Further, having a shareholder’s or director’s agreement also protects the minority shareholders, who may have different interests to the majority. This agreement ensures they are all protected.
What should be included in a Director and Shareholder Agreement?
A shareholder’s or director’s agreement should include the businesses management structure, as well as outlining the obligations of each owner, including how they will acquire their shares. It should also include provisions for decision making and who can make what types of decisions. Disputes should also be considered when putting together a shareholder’s or director’s agreement. Hence, an effective way to manage director disputes is to have penalties for breaches set out within the agreement, ideally when the Company is first setup or soon after. Lastly, a shareholder’s agreement should include an exit strategy. An exit strategy includes information around what would happen if shareholders or directors wished to exit the business.
A shareholders’ or director’s agreement usually operates together with the company constitution. If there is inconsistency between the two, the agreement should contain a term providing that it outweighs the constitution. In closely held proprietary companies, it is recommended that shareholders and directors do not rely solely upon the company constitution. This is because a constitution is usually a ‘one size fits all’ document and does not deal with a range of matters that the agreement would. Furthermore, a shareholders’ agreement should include specific business requirements, tailored to the business operations.
An often-overlooked key component in business, is what happens if one of the business partners becomes incapacitated or dies. Does the surviving party want to be in business with the deceased family, who are often beneficiaries of the deceased Estate and therefore would be gifted the business interest? If the answer is no, you need to ensure your agreements cover off on this possible event.
If you need advice around what to include in your director’s or shareholder’s agreement, please speak with your solicitor, or contact us for a discussion around financial arrangements.