Why You Need A Shareholders Agreement

Dear Entrepreneur,

It is common to hear the word shares or share capital being used in the business sector especially relating to a Limited Liability Company (LLC) or a Public Limited Company (PLC). The word ‘Share’ is synonymous with ownership rights in a company and represents the limits of an individual or corporations rights in a business entity. A Limited Liability Company comprised of various stakeholders with no Shareholders Agreement can be likened to a Country without a Constitution and proper legal system for enforcement of order and the resultant effect would  be chaos and unrest.

It is advisable for every Company with more than one stakeholder to have a Shareholder agreement that ensures that the running of the company and the responsibilities of the shareholders are properly thought through, there is clarity and certainty as to what can or cannot be done and decisions are taken by consensus and discussion.  As a result, it will reduce the potential for conflict between shareholders and help the company to be run smoothly and profitably. Our discourse this week highlights 6 reasons you need a Shareholders Agreement.

SME Business Support Nigeria

#1 Having a shareholders agreement is a cheap way to minimize business disputes between owners by making it clear how certain decisions are made and also by providing a framework and procedures for dispute resolution.

#2 In a situation where there is a change in the circumstance of any partner it will limit the effect on the business. The agreement safeguards the interests of all shareholders and the interests of the shareholders’ families in the event of the death or insolvency of a shareholder

#3 The existence of a shareholder agreement can assist in raising finance from Creditors because it demonstrates the stability of the business.

#4 A shareholders agreement can protect the rights of minority shareholders and limit the tyranny of the majority. It can also allow for the process for amicably dissolving the union in the event things can no longer work amongst the partners.  

#5 A Shareholders agreement can restrict how shares are sold by any of the partners to avoid shares ending up in the hands of people who might not share your opinion on running the Company.

#6 A Shareholders Agreement allows you to assign different rights to different share classes, meaning you keep control of your company even if your ownership is reduced to a minority.

Parting Thoughts

Having a well thought-out and carefully drafted shareholders agreement will allow you and your team focus on growing the Company for profit and because shareholder agreements are fairly serious legal documents,  it’s advisable to consult a professional who can guide you through the process.

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