4 Factors to Consider in a Shareholders' Agreement

While it is often for the best for a single leader to be at the helm of the company, when it comes to larger enterprises this is seldom possible. Sometimes, a person with a vision may not be able to gather enough funds for their projects (even with bank loans, personal loans and selling of the asset), which would mean that they have to turn to others for help. These ‘benefactors’ usually agree to help in exchange for a share in the company which turns them into its shareholders. Nonetheless, not everyone with enough money should be considered an adequate shareholder. Here are four factors you must consider before you agree to sell the shares of your company to an interested party.

1. The issue of finances

Sure, the issue of how much money a shareholder can contribute to your business is not the only thing that matters, but it is still one of the most important topics that need to be addressed. When first composing a shareholder agreement you must clearly state how much shareholder in question should contribute when it comes to the working capital of the company. It is customary that each shareholder contributes according to their portion of the shares, but there are some exceptions.

2. Management structure

People are very cautious when their funds are in question, which is why each shareholder will want to have a say in major company policies. Of course, it is only reasonable that they be included in the overall decision making, but such a practice can often backfire. Every company needs to have a long term goal and in order to reach them, they need to be governed by a clearly set chain of command. In other words, company’s directors and management structure need to have a certain autonomy in order to pursue the interests of a company. This is why, you need to set an agreement from a very start that would prevent too much meddling from shareholders.

3. Predicting a contract breach

Even though you may have an ironclad agreement, covering most scenarios that are likely to befall your company, keep in mind that things don’t always turn out this way. After all, if everyone always held their part of the agreement we wouldn’t need contracts in the first place. Nonetheless, when you decide to look for a suitable shareholders agreement template you need to make sure that its dispute resolution process is described to your liking.

4. Thinking about deadlock

Deadlock is what happens in a case where there is a disagreement between two parties which both hold a 50 percent share in the company (usually a scenario with two equal owners). You need to have it clearly stated in the agreement which method of tie-breaker is going to be used. Most common ones are the ‘Russian roulette’ where one shareholder is forced to buy out the other and the ‘Texas shoot-out’ where both make a sealed bid to buy the other sides shares and the higher offer wins. Nonetheless, the most common option is going with a simple form of mediation, where both sides agree to introduce a third party into the dispute on whose decision they will both agree.

Conclusion

Keep in mind that just because you share the similar interest with someone, your visions for the future of the company don’t necessarily have to be the same as well. Unfortunately, this means that over the course of years you will be faced with many potential conflicts within your own company, each of which has a chance of bringing the entire enterprise at a halt. The only way to avoid this is to make a solid shareholders agreement and keep both your eyes open when selling a part of your shares to someone new.